Cash and Carry Trading Strategies on Levana Perpetual Swaps — ATOM Market
Introduction to Cash and Carry
Cash and carry is a trading strategy that aims to benefit from funding rates while maintaining no price exposure to the underlying market . At its core, the strategy involves holding a long position in an asset (the cash) while simultaneously holding a short position on the perps platform (the carry) for the same asset.
For instance, if you have $100 of long ATOM and $100 of short ATOM, you essentially have no exposure to the price movement of ATOM. That’s the beauty of the cash and carry method — it enables traders to profit from market conditions while remaining price neutral.
With the Levana Perpetual Swaps ATOM market, it’s possible to utilize the platform’s funding rates and stATOM — a liquid staked derivative of ATOM — to potentially earn a high yield while maintaining market neutrality.
Understanding the Funding Rate
The funding rate on Levana is key to this strategy.
When the long open interest is larger than the short open interest, the short funding rate goes negative and the long goes positive. In the above scenario, this means that short traders — are paid a fee to keep their positions open.
Opening a Short Position and Establishing Market Neutrality
To start, you’ll need to have a sense of the maximum position size that should be opened. To accomplish that go to the Levana Stats page in https://trade.levana.finance/stats/ATOM_USD and see the Open Long Interest vs Open Short Interest.
As we see, Longs outnumber Shorts $17.3K in this scenario. In order to continue to get paid funding fees, we need to make sure that total Short Open Interest is slightly less than Long Open Interest. That means that we should NOT be opening a position size of more than $17.3K.
Keep in Mind! As the total amount of Short open interest continues to climb, the funding fees that are paid out to short position holders consequently decreases.
Shorting
Let’s continue — Open a short position on the Levana Perpetual Swaps ATOM market. This allows you to profit whenever ATOM price drops, hedging the spot stATOM (available on Osmosis DEX) that you will be holding.
(Max is amount of Collateral you have in wallet)
To make this position market neutral, you’ll also need to buy an amount of stATOM provided by Stride equivalent to the total position size of your short (Ex. $10 at 10x Leverage is $100 total position size). This balances your total position to have no exposure to the price movement of Atom.
Longing — Buying stATOM
Purchasing stATOM can be done on the Osmosis Decentralized Exchange (DEX) with low slippage and low fees or directly from the Stride Website here https://app.stride.zone/.
As you hold this stATOM, it automatically earns staking rewards at a rate of roughly 20%, providing another stream of revenue.
The Benefits
By holding both a short ATOM position and an equivalent stATOM position, you’ll effectively be getting paid twice — once from the negative funding rate and once from the staking rewards of stATOM — all while not being exposed to the price fluctuations of ATOM.
Managing Risks
While this strategy may seem attractive, it’s crucial to understand the associated risks.
The biggest risk to the strategy is the liquidation or take profit of the short position at an inopportune time while you still hold the balancing stATOM which means becoming exposed to the price movements. To reduce that risk, the leverage of the short position shouldn’t be overly large in order to reduce the risk of liquidation. Going as low as 5x or even 2x enables less management of the open position.
The other risk is funding rates decreasing or even flipping before the strategy makes enough profit to offset trading fees. Fortunately, closing the short carry position when the protocol is closer to balance will in total pay you a delta-neutrality fee which may off-set part or all of the cost of the trade. This will become a bigger component when Levana lifts the current liquidity provider TVL cap in place.
Lastly, borrow fees are an ongoing cost for the short position. That cost can be decreased by decreasing the take profit price slider (See Figure A vs Figure B). This is a trade-off between the on-going cost and a risk of realizing profits on the short position and becoming non delta-neutral because of the stATOM that is still held. Choosing the take profit price that is the same delta from current price as liquidation price is a good approach to strike a balance between costs and risk.
Figure A
Figure B
Best Practices
Like any trading strategy, it’s crucial to start small and limit your risk exposure. Keep a detailed record of your trades and the performance of this cash and carry strategy over time. This will help you identify trends and make more informed decisions in the future.
Also, never risk more than you’re willing to lose. This might seem like a cliché, but it’s particularly relevant when dealing with leverage and complex strategies like cash and carry.
In conclusion, while cash and carry provides an opportunity to earn yield while being market neutral, it’s important to understand all the mechanics and risks before diving in. Stay informed, stay cautious, and happy trading!
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