Cash and Carry Trade with ETH on Deribit platform

  • The author has been trading options with crypto on the Deribit platform with mixed success, but recently found success with a trading strategy focused on weekly calls and put options, earning small premiums consistently.
  • The author explored the idea of cash and carry trades but found the potential returns to be less attractive compared to options trading. However, they recognize that there is potential for a 30-40% return using perpetual futures contracts with 50x leverage.
  • The cash and carry trade involves exploiting the price difference between the underlying asset and its corresponding derivative. The author shares an example trade using Ethereum, highlighting potential profits depending on the price movement of ETH on the expiry date.

| Crypto | 30 seen

Time after time I like to test some new trade ideas, and this time I decided to give it a try and test the so-called cash and carry trade with Ethereum.

A cash-and-carry trade is an arbitrage strategy that exploits the mispricing between the underlying asset and its corresponding derivative. The key to profiting from this strategy is the eventual correction in that mispricing.

Long story short, for the past couple of years I trade options with crypto on the Deribit trading platform with some mixed success, for now, it seems I have found my way for trading options there - I trade weekly calls and put options with a delta under 0.1 (-0.10), and for the last couple of months this trading strategy seems is working great - pocketing small bits of the premium week after week.

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I first heard about cash and carry trades about a year ago at one of the Crypto guy meetings here in Tbilisi, I did my research back then, found that the potential probably is not as great as options trading, and left it aside.

Time passed and I thought to give it another look.

Now, as I had some ETH on the Deribit I decided to take a more practical approach and actually created my first cash and carry trade using ETH perpetual future and ETH future with a set expiry date,

I was intrigued by the Future spread option available on the Deribit platform, but unfortunately, there were no buyers/sellers and my order never got filled, so I was left with no other option but to opt for the manual way, and here is how:

I bought ETH perpetual contract (long) at  $1,798.00 and sold (short) September 29, 2023 contract at  $1,801.72.

here is the trade setup:

  • Long  2 ETH Perpetual for $3,596 at $1,798.00
  • Short 2 ETH  SEP 29'23 for $3.600 at $1,801.72

The difference between those two seems rather small, just $3.71, but here is the magic - on the Deribit trading platform you are trading with 50x leverage, meaning to open these positions I deposited just 0.1 ETH (for actual trades I was required even less, about 0.08 ETH in margin). 

If all goes according to the plan, then on the short futures expiry date, the spot price should align with the perpetual futures contract, technically meaning - this is a market-neutral trade, and no matter if ETH rallies to $5000 or drops $500 I will still make a profit, at least in terms of ETH,

What happens next

On September 29, 2023, ETH is trading at $2,000:

I book 0.201 ETH profit from closing the long position and take a loss of -0.199 from closing the short position, difference/profit: 0.0019 ETH if converted back to USD, just $3.81 (2.3% yield)

Ethereum futures trading
  • If ETH is Trading at $3,500 I book 0.971 profit from closing the long position and take a loss of -0.9705 from closing the short position, difference/profit: 0.00105 ETH if converted back to USD, just $3.68 (1.31% yield)
  • If ETH is Trading at $500 I take a loss of  -5.193 from closing the long position and book a profit of 5.200909287 from closing the short position, difference/profit:  0.0079 ETH if converted back to USD, just $3.95 (9.8% yield)

In theory, I'm making a profit in any case, in practice it depends on how will I manage to actually close the positions on the expiry.

Potential income return doesn't seem too attractive, at least for me, as by trading weekly/monthly options the return seems much higher. 

Anyhow I see these cash-and-carry trades here to stay and evolve. By doing some quick math I was able to notice about a 30-40% potential return from cash and carry trades using perpetual futures contracts and a 50x margin.

For example, on May 14, 2023, we could go long at $1,808 with $100,000  on the Deribit trading platform, which would require just 1.01 ETH as margin and short $100,0000 at $1,832 with March 29, 2024 expiry requiring as another 1.01 ETH as margin. No matter the price of ETH on the expiry in theory we would make 0.72 ETH from this trade. That would give about a 35.6% return in 320 days.

Say we bought 2.02 ETH at $1,808 on May 14, 2023. Our total investment would be $3652.16. 

Say on the expiry date price for ETH would be $2000, we would have 2.74 ETH worth $5,480. Profit from this trade would net $1,828, or 50% in dollar terms.

In case ETH will trade at $500, we still will have 2.74 ETH, just their total worth will be $1,370, or we will lose more than $2,000 here.

Just like in the case of covered calls, the biggest drawback from this trade would be if the asset price would drop significantly.

Now, what are your thoughts on cash and carry trades? Leave me a comment!