#SpotVSFuturesStrategy Spot versus Futures Strategy#
Trading spot and futures contracts requires completely different methodologies. What strategies do you use in each market? How do you manage risks and position sizes differently when trading spot versus futures?
The spot versus futures strategy involves taking positions in the spot market and the futures market simultaneously to exploit price differences or hedge risks. Below is a breakdown of the main strategies that include both:
- 1. Cash arbitrage and holding (contango market) is used when:
- Futures contracts are traded at a premium to spot contracts. How it works:
- Buying the asset in the spot market.
- Selling a futures contract (same asset, same expiration date).
- Holding the asset until the expiration of the futures contracts.
- Delivery of the asset for the settlement of the futures contract.
- Profit = Futures price - Spot price - Holding costs interest:
- Risk-free profit if the costs (storage, financing) are less than the futures premium.
-- 2. Cash arbitrage and reverse delivery (reverse trading market) is used when:
Futures contracts are traded at a discount to the spot market. How it works: Sell the asset in the spot market (short selling or using held inventory).
- Buying a futures contract.
- Upon expiration, receive the asset through the futures contract and cover the short position. Profit: Spot market price - Futures price - Borrowing costs (if any).
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