Carry Trading Across FX, Rates, Options, Equities, and Crypto
Summary
Carry is a position expected to earn a return as time passes, provided prices and other conditions remain stable. The document explains this through currency yield differentials, rolling bond and stock futures, and selling options, then describes perpetual futures: when they trade above or below spot, funding payments pass between longs and shorts. A possible strategy is to short a premium perpetual and buy spot to hedge directional exposure, collecting funding while the premium persists.
Historical examples suggest carry has sometimes earned returns from both yield and price movement, contrary to simple parity expectations. The trade-off is a return profile that may deliver small gains often but suffer sharp losses, with different carry strategies tending to fall together. The author says traditional opportunities have weakened in recent years and crypto funding trades have become more crowded. Basket approaches can add idiosyncratic risk, rebalancing demands, and illiquidity. The document emphasizes careful sizing and notes that costs, changing market conditions, and the persistence of the premium determine whether a trade is viable.
Key ideas
- Carry strategies aim to earn from holding a position as time passes, assuming other conditions remain stable.
- Examples include FX yield differentials, rolling bond and equity futures, and selling options premium.
- Perpetual futures funding can create a carry opportunity when premiums or discounts persist against spot.
- Carry returns may be positively skewed, with frequent modest gains and occasional sharp drawdowns.
- Diversification may offer limited protection because carry strategies can lose together, making position sizing important.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.