Spot and Perpetual Funding Rate Arbitrage
Summary
The document explains funding payments as a mechanism used by perpetual futures to help keep contract prices anchored to spot when there is no expiry and settlement. It describes the usual payment direction: when funding is positive, longs pay shorts; when negative, shorts pay longs. Its central strategy pairs equal-sized spot and perpetual positions in opposite directions, aiming to collect funding while reducing exposure to broad price moves. The long-spot, short-perpetual setup is presented for positive funding, with the reverse pairing for negative funding.
Worked examples separate funding income from changes in the spot-perpetual price gap, showing that combined profit or loss depends on both. The text also proposes closing when basis gains cover fees or when the next funding payment is expected to be unfavorable. These are simplified illustrations, not performance evidence. Funding rates, exchange rules, basis movements, fees, execution, and the ability to maintain matched positions can all affect realized results; the excerpt does not quantify those risks or fully develop the reverse setup.
Key ideas
- Perpetual funding payments are described as a way to moderate divergence between perpetual and spot prices.
- With positive funding, the example strategy buys spot and sells an equal-sized perpetual position.
- With negative funding, the document proposes selling spot and buying the perpetual position.
- Returns combine funding payments with gains or losses from changes in the spot-perpetual basis.
- The examples omit a full treatment of execution costs and other practical risks.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.