Cash-and-Carry Arbitrage Through Futures and Spot Spread Convergence

Summary

The article explains a spot-and-futures spread trade: buy the cheaper leg and sell the more expensive one, then close as the price gap narrows. Its examples start with spot priced at 10 and futures at 15, and show the combined position retaining a five-unit gain when both prices converge at different common levels. The intended insight is that the payoff depends on the entry and exit spreads rather than the direction of the shared price move.

It introduces spread rate as a way to compare the gap with spot value and says costs must be covered before a trade is attractive. A cited Bitcoin episode illustrates that the spread can change sharply, but this is a single historical example, not a tested record. The article calls the trade low risk and effectively risk-free, yet convergence timing, trading fees, funding, liquidity, basis changes, and leg execution can affect realized results. It also notes that the two legs require more effort than a directional futures position and that spread opportunities may be difficult to monitor manually.

Key ideas

• The proposed trade buys the lower-priced leg and sells the higher-priced leg.
• The examples show how convergence can make the net result depend on the change in the spread.
• The article uses the spread relative to spot value to assess whether a trade may cover fees.
• The Bitcoin example is a historical illustration and does not establish repeatable returns.
• Execution costs and the timing of convergence can undermine the claim of stable, low-risk profits.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.