Spin Trading Strategies: Basis Trading, Hedging, and Buying Spreads
Following the recent release of Spin Perpetuals, we are excited to share with you a few strategies that can be executed when you combine Perpetuals with Spot trading.
Most people are well aware about the classic trading strategies – buy low, sell high or vice versa. Though, there are many more use cases of Perpetuals, especially in a combination with spot trading, and some of them make your profits independent of asset price fluctuations. Eager to learn more? Then LFG!
As you already know, Perpetual Contracts follow the price of the underlying assets, and this is done thanks to the funding rate. When the funding rate is positive, the Perpetual Contract price is higher than the Spot asset price, thus the platform incentivizes users for selling Perpetual and vice versa to bring the price closer to Spot. The funding payments that incentivize users other buy or sell a Perp are based on the funding rate.
So, what can users do to extract profit? If the funding rate is positive, try doing the following:
- Buy Perpetual’s underlying asset on Spot, say 500 NEAR.
- Deposit USDC to your margin account, e.g. 500 USDC.
- Sell 500 NEAR-Perp.
Imagine the NEAR spot price is 3 USDC, and the NEAR-Perp price is 3.1.
In this case, your position is delta-neutral, because the NEAR price can’t affect your PnL at all. If the price move down you will lose money on your Spot position, but you will earn money with NEAR-Perp, thus your PnL will be equal to zero.
So how do we extract yield? The answer is funding rate payments. Considering that the funding is positive and the user has a short position, user’s unrealized PnL increases by the funding amount. In the example above it is 0.625 USDC per hour, 15 USDC for 24 hours and 5,475 USDC for 365 days.
This way, you invest $2,000 and enjoy a 273% APY till the funding rate reduces.
In case the funding rate is negative, basis trading is more difficult:
- You have to burrow NEAR, on Burrow Cash for example.
- Then you sell NEAR on Spot.
- Buy NEAR-Perp.
- And collect funding! Capital efficiency in this case is lower and you have to control your risk parameters on Burrow, but it works!
Say, you have positions in different assets, e.g. Near, NearX, PEM, PARAS, etc. and you think that the market will go down in a short term. The first option most people have in mind is to sell the tokens, but it’s not convenient, especially if some tokens are used for staking, farming, or are potentially vested.
In this case, you can just short NEAR-Perp to hedge. Most tokens correlate in price, so shorting NEAR-Perps will hedge your positions, partly or fully. Moreover, Perpetuals’ fees are lower in comparison to the spot market, so you will spend less!
Buying spreads is a more advanced strategy. If you think that the price of an asset will rise against BTC, but you are not sure about the price of the asset in USDC, you can buy the asset on spot and sell BTC-Perp for an equal amount.
For example, the NEAR price is $3 and the BTC price is $20,000. You buy 300 NEAR on Spot ($900) and sell 0.045 BTC-Perp ($900). In this case, your total PnL will change only if the NEAR/BTC price is changing. This strategy works well if you think the entire crypto-market is weak but NEAR should go up due to some circumstances.