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Exiting BTC with a Cash and Carry Premium Arbitrage


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Exiting BTC with a Cash and Carry Premium Arbitrage

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  #1 (permalink)
qudizzle
Cape Town, Western Cape, South Africa
 
 
Posts: 5 since Oct 2021
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Hi Everyone,

I am an intermediate Futures trader, and know he basics pretty well, but I have a niche issue that hopefully someone can help me with.

I want to exit my spot BTC position by selling futures contracts (for example the June 2022 delivery futures) equal to my BTC holdings. I will then use all my coins to margin the account. Doing this will effectly allow me to lock in about 20 to 30% premium in addition to my sale price. This is known as a "Cash and Carry Premium Arbitrage" if I am not mistaken.

Now a small problem - the contract (on Binance) is delivered in BTC, which means I will need to close the contract -> transfer to my spot account -> then sell the BTC to lock in the USD gains, - but this means i will be exposed to market volatility for a few minutes while complete this BTC to USD conversion process - which could cost me a few percentage points if market moves against me.

So one way to solve this is if I could use a Coin margined future which is delivered in USD. Does something like this exist?

Second solution is a bot/program I can use to automate this this final process to limit the loss? I know I could probably do this with Binance API - but I don't have programming know-how.

edit: should have opened this in the crypto futures - sorry about that

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  #2 (permalink)
 SMCJB 
Legendary Market Wizard
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Seems like a easy question, but in reality it's not as easy as you might think. How does the futures contract settle?

For example. In the REGULATED futures space their are two contracts, CME Bitcoin (and their Micro contract) and ICE Bitcoin. The CME contract at expiry is cash settled against their Bitcoin Benchmark Index. Hence if you were long Bitcoin and sold the CME future against it you would need to sell your Bitcoin at expiry at a price as close as possible to their Benchmark Index. The ICE contract at expiry is physically settled. Hence if you were long Bitcoin and sold the ICE future against it you would need to transfer your Bitcoin to the ICE/Bakkt Warehouse before delivery, and then at delivery your spot and futures position would become one and go away.

Question for you. What do you do if Bitcoin rallies to say $100,000. Your futures position will lose $38k and your Bitcoin position will make $38k. The exchange will want their $38k for the futures loss though, but you can't get your gain on the Bitcoin unless you sell it?

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  #3 (permalink)
 Onecarl78 
NY, ny
 
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Interesting problem and unsure if there is an actual simple solution. The carry trade actually hurt Warren Buffet with the volatility in BTC this year and caused them to step away.

I know of no coin margined futures contracts and the futures are very capital intensive (except for the micro). You may have an easier time trading the differences in front months of the futures contracts but I still think its too volatile for that.

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  #4 (permalink)
 SMCJB 
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CME and ICE both (currently) have a 35% of notional amount margin requirement and neither provide offset for coins held. Hence to perform cash and carry with regulated futures you actually need 135% of the Bitcoin value.

The cash implications of the margin requirement on the futures leg is definitely something you should think about. As I said previously if Bitcoin rallies to say $100,000, you will probably have to post $38k/coin to support your futures position. Being cynical, @Onecarl78 that's why they don't have coin margined contracts, they want your cash!

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  #5 (permalink)
 bobwest 
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@Onecarl78, @SMCJB, I have no expertise on this question whatever, but reading over these last few posts, what is being discussed/attempted seems extremely Rube Goldberg-ish. The parts seem to not be made to fit together.

Just my observation as a bystander.

Bob.

When one door closes, another opens.
-- Cervantes, Don Quixote
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  #6 (permalink)
 SMCJB 
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Wikipedia Rube Goldberg machine

Yes very good @bobwest. I learnt something new there. It is something that seems very easy but is actually very difficult to do in actuality. It's definitely possible as long as you have bottomless pockets to hold the futures short/marginable leg.

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  #7 (permalink)
qudizzle
Cape Town, Western Cape, South Africa
 
 
Posts: 5 since Oct 2021
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I have considered your point, which is why ideally I want (or need) the contract to be margined in BTC.

This way if BTC rallies to 100k, then my margin with appreciate by the same amount that the contract loses.

On the other hand, it but it would be nice it if would convert (settle) in USD so I don't need to sell my BTC post expiry, where I would be exposed to price volatility, hope this makes sense?

It sounds like ICE would would a good way to go if they allow BTC for margin


SMCJB View Post
Seems like a easy question, but in reality it's not as easy as you might think. How does the futures contract settle?

For example. In the REGULATED futures space their are two contracts, CME Bitcoin (and their Micro contract) and ICE Bitcoin. The CME contract at expiry is cash settled against their Bitcoin Benchmark Index. Hence if you were long Bitcoin and sold the CME future against it you would need to sell your Bitcoin at expiry at a price as close as possible to their Benchmark Index. The ICE contract at expiry is physically settled. Hence if you were long Bitcoin and sold the ICE future against it you would need to transfer your Bitcoin to the ICE/Bakkt Warehouse before delivery, and then at delivery your spot and futures position would become one and go away.

Question for you. What do you do if Bitcoin rallies to say $100,000. Your futures position will lose $38k and your Bitcoin position will make $38k. The exchange will want their $38k for the futures loss though, but you can't get your gain on the Bitcoin unless you sell it?


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  #8 (permalink)
qudizzle
Cape Town, Western Cape, South Africa
 
 
Posts: 5 since Oct 2021
Thanks: 5 given, 4 received

Coin exchanges like Binance do offer coin margined contracts, but as Mr SMCJB stated, it is unregulated option, (unlike CME or ICE which are regulated - but dont offer BTC margin).

So Binance contract is great, since I only need 100% capital, but since I settle is BTC too, then I need to sell after the contract to lock in the USD gains, if I am too slow with it, I can lose a few % to a quick BTC price move!

I am playing around with API to be able to do this within microseconds, since doing it manually is cumbersome and can take like 2 minutes, since I need to transfer my BTC from my futures account to Spot account first, then sell.


Onecarl78 View Post
Interesting problem and unsure if there is an actual simple solution. The carry trade actually hurt Warren Buffet with the volatility in BTC this year and caused them to step away.

I know of no coin margined futures contracts and the futures are very capital intensive (except for the micro). You may have an easier time trading the differences in front months of the futures contracts but I still think its too volatile for that.


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  #9 (permalink)
qudizzle
Cape Town, Western Cape, South Africa
 
 
Posts: 5 since Oct 2021
Thanks: 5 given, 4 received

You may be right - perhaps the reason the premiums are high is because there is no risk free way to capture them!


bobwest View Post
@Onecarl78, @SMCJB, I have no expertise on this question whatever, but reading over these last few posts, what is being discussed/attempted seems extremely Rube Goldberg-ish. The parts seem to not be made to fit together.

Just my observation as a bystander.

Bob.


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