A Word About "Arbitrage"...

[misterkel]

Even buying a physical commodity and selling the direct analog futures contract is not technically an arbitrage.

Okay, but what about a futures arb against the underlying for a non-physical instrument (or a non-delivered instrument?) For example, BTC June futures vs underlying. Trade is long BTC, short futs. There might be some pain if the price goes up, but all you need is capital to cover the spread and you're fine.

Here are the numbers right now. That's an absolute return of 9% over 3.5 months. Annualized is a mouthwatering 36%. Whenever crypto is hot, those returns are there for anyone with enough capital to claim them. I would say that's an arbitrage, but I'm interested in your opinion. Thoughts?

 

[bone]

I think your example is closer to an arbitrage than some other examples I’ve seen.

Having said that - you need to be able to explain the persistent price divergence between the two.
How does the price differential converge or diverge over time?

If you are relying upon the non-fungible differential to calculate your ROR that might not hold up, either.

Okay, but what about a futures arb against the underlying for a non-physical instrument (or a non-delivered instrument?) For example, BTC June futures vs underlying. Trade is long BTC, short futs. There might be some pain if the price goes up, but all you need is capital to cover the spread and you're fine.

View attachment 254441

Here are the numbers right now. That's an absolute return of 9% over 3.5 months. Annualized is a mouthwatering 36%. Whenever crypto is hot, those returns are there for anyone with enough capital to claim them. I would say that's an arbitrage, but I'm interested in your opinion. Thoughts?

 

[misterkel]

I think your example is closer to an arbitrage than some other examples I’ve seen.

Having said that - you need to be able to explain the persistent price divergence between the two.
How does the price differential converge or diverge over time?

If you are relying upon the non-fungible differential to calculate your ROR that might not hold up, either.

The future settles to the index price on expiry, so it's a true arbitrage. That said, it's not 100% risk-free. When BTC moves up hard, the differential widens, so if you're leveraged up (which is kind of hard to do when you have to own the underlying, but when it goes up, you wind up leveraged. Happened to me in this last run-up.)

I don't know what you mean by non-fungible differential. I've done the trade multiple times and it works.

 

[bone]

It’s a VWAP financially settled contract so it’s not deliverable was simply my point. And yes, it needs to track BTC for the futures to work. I’m glad that you’re doing a legit arb !

The future settles to the index price on expiry, so it's a true arbitrage. That said, it's not 100% risk-free. When BTC moves up hard, the differential widens, so if you're leveraged up (which is kind of hard to do when you have to own the underlying, but when it goes up, you wind up leveraged. Happened to me in this last run-up.)

I don't know what you mean by non-fungible differential. I've done the trade multiple times and it works.

 

[traderjo]

Okay, but what about a futures arb against the underlying for a non-physical instrument (or a non-delivered instrument?) For example, BTC June futures vs underlying. Trade is long BTC, short futs. There might be some pain if the price goes up, but all you need is capital to cover the spread and you're fine.

View attachment 254441

Here are the numbers right now. That's an absolute return of 9% over 3.5 months. Annualized is a mouthwatering 36%. Whenever crypto is hot, those returns are there for anyone with enough capital to claim them. I would say that's an arbitrage, but I'm interested in your opinion. Thoughts?

But is there not a risk specially given that one is a large Exchange traded product and the "underlyingBTC" could be on a dodgy exchange with all the associated risks?
also the retune of 9% based on what total $ you have to outlay for 2 margins? or 1 Futures leg margin and full price for the underlying BTC long?

By the way What about Singe stock futures and the stock that would be a carry trade! guaranteed to converge on expiry of futures?

 

[traderjo]

Are box spreads considered arbitrage?

Is it not true BOX spread give you money in your account which can't be used anywhere else! but to offset borrow cost of your Margin loan with same account .. so how is it an Arb?

 

[misterkel]

But is there not a risk specially given that one is a large Exchange traded product and the "underlyingBTC" could be on a dodgy exchange with all the associated risks?

You can do both on one exchange. Not all crypto exchanges are dodgy, though some certainly are. Binance is rock-solid. I also like ftx, though it's a newer entry. Both have institutional backers. Both are transparent as to leadership, security, etc.

 

[traderjo]

You can do both on one exchange. Not all crypto exchanges are dodgy, though some certainly are. Binance is rock-solid. I also like ftx, though it's a newer entry. Both have institutional backers. Both are transparent as to leadership, security, etc.

You can do both on one exchange. ? CME?
One leg is BTC so has to be on CME

 

[misterkel]

You can do both on one exchange. ? CME?
One leg is BTC so has to be on CME

You can't buy BTC on CME, only futures. I'm pretty sure they're cash settled. Bitcoin only exists in the conventional markets as custodial fund instruments like Grayscale. You can't trade it directly on the CME. But I'm not expert on the latest developments, so I'm not sure what's possible and not now.

You can do both underlying and future - the entire trade - on Binance, Deribit, Bitmex or ftx. Others, too, but those are well-vetted exchanges with solid security. Some people don't like Bitmex because they think the exchange gives back-door kickbacks to market makers. I don't know if it's true or not.
ftx has the best spreads. Deribit has the best margin structure. Binance has the best liquidity, but I don't know about it's US citizen policy.

 

[Sig]

You can't buy BTC on CME, only futures. I'm pretty sure they're cash settled. Bitcoin only exists in the conventional markets as custodial fund instruments like Grayscale. You can't trade it directly on the CME. But I'm not expert on the latest developments, so I'm not sure what's possible and not now.

You can do both underlying and future - the entire trade - on Binance, Deribit, Bitmex or ftx. Others, too, but those are well-vetted exchanges with solid security. Some people don't like Bitmex because they think the exchange gives back-door kickbacks to market makers. I don't know if it's true or not.
ftx has the best spreads. Deribit has the best margin structure. Binance has the best liquidity, but I don't know about it's US citizen policy.

So none of those futures are U.S. regulated. Which makes them risky to the tune of the amount of risk premium you're getting. The only legitimate arb would be with CME or ICE bitcoin futures but because you can't also hold actual BTC at any broker where you hold your CME or ICE futures (can you?) then you're left in the position of having to make exchanges from your BTC to USD to your broker back and forth in response to your margin changing with price moves. Which again about evens out the arb opportunity.