Spread Trading: Mean Reversion, Leg Hedging, and Execution

Summary

This guide explains spread trading across related instruments, contrasting it with single-instrument trend strategies. It presents several approaches: latency-sensitive arbitrage between equivalent markets, threshold or Bollinger Band mean-reversion trades in related contracts, and longer-horizon trades based on fundamental research. It describes constructing a synthetic spread from weighted legs and matching trade quantities when contract sizes differ.

Execution centers on completing an active leg and promptly hedging it with a more liquid passive leg. A spread-taking algorithm can use marketable limit orders and repeat submissions, while a basic automated strategy opens and closes long or short spread positions at preset thresholds. Examples illustrate synthetic contract quotes, order sequencing, and strategy behavior. The guide offers operational explanations rather than tested results; fixed thresholds assume a stable mean, and the text acknowledges that trending or shifting spreads may require different logic. Arbitrage opportunities also depend on execution speed and costs.

Key ideas

• Spread trades express a view on the relative price of related instruments rather than one outright price.
• Synthetic spreads combine weighted legs, with trade quantities adjusted for contract multipliers and sizes.
• Mean-reversion entries can use fixed thresholds or bands, while fundamental spreads rely on research.
• An active leg is filled first and a passive leg is then used to hedge exposure.
• Preset threshold strategies may be unsuitable when the spread mean shifts or the spread trends.

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• Strategies ADA Hedged Funding Carry at Binance's Interest-Rate Floor: Long ADAUSDT Spot + Short ADAUSDT USD-M Perp While the Trailing 3-Day Mean Funding Is >= 0.01%/8h, Flat When It Turns Negative (1H bars, delta-neutral, ~50% time-in-market)
• Hypotheses ADA Hedged Funding Carry at Binance's Interest-Rate Floor: Long ADAUSDT Spot + Short ADAUSDT USD-M Perp While the Trailing 3-Day Mean Funding Is >= 0.01%/8h, Flat When It Turns Negative (1H bars, delta-neutral, ~50% time-in-market)

From a private course collection; the original is not published.