HodlX Guest Blog Submit Your Post
Calendar spread arbitrage is a common hedging practice that takes advantage of discrepancies in extrinsic value across two different expiration contracts of the same token, in order to make a risk-free profit.
What Is Calendar Spread Arbitrage Strategy?
Futures price reflects the market sentiment of the subject’s price. In the futures market, a different settlement time contract of the same token will differ. For example, at time of writing, the mark price of BTC quarterly contract is USD 10,033.3, while that of the bi-weekly contract is USD 9,973.88.
In this report, we will refer to the price difference between a quarterly contract and a bi-weekly contract as “spread”:
Spread = Quarterly contract price — bi-weekly contract price
The futures price would fluctuate under the influence of different market factors, and the true range (spread fluctuate range) of futures with a different expiration date will also change. For example, at time of writing, the BTC quarterly contract price dropped 1.35% while the bi-weekly dropped 1.06%.
To earn a guaranteed profit from calendar spread arbitrage, the spread must fluctuate within the two positions the trader takes, which can be predicted from historical trading records.
As shown in the above examples, the amount of profit one can gain from calendar spread arbitrage is only related to the “spread” of different contracts instead of price. When the market is bullish, use long arbitrage; when the market is bearish, use short arbitrage. In this way, you can guarantee a stable profit despite market volatile. The benefit of a futures spread is that the trader has taken two positions. This allows them to earn a guaranteed profit from the exercise of both positions.