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2.3.2 Spread Trading

July 08, 2020

What are Futures Spreads


CoinFLEX will initially list Quarterly-Perp spread markets.


Futures spreads are extremely popular in traditional futures markets and CoinFLEX is the first crypto Futures Exchange to bring these to crypto as its own order type within its own order books.




Spreads involve simultaneously buying one month (say the Sept 25 futures) and selling another market (say the perpetual futures). As the trades are executed simultaneously there is no delta or leg risk for the trader but instead the trader is exposed to movements in the value of that spread.


Spread = [Quarterly futures price] – [Perp price]

Reference (Quarterly futures):

  • On the last Friday of the quarter at noon (12:00) UTC, the Quarterly leg is rolled into a Perpetual leg, thus closing out the spread position. 
  • e.g. at 12:00 UTC Friday December 25, 2020, the Quarterly leg will be rolled into a Perpetual, which closes out the opposing Perpetual leg from the spread trade.


Currently, in crypto, only professional traders and firms using high frequency algorithmic trading bots can take advantage of the price differential caused by when one futures month becomes expensive in comparison to another month.


On CoinFLEX, whether you are buying or selling a spread is defined by which direction you are trading on the longer-dated futures. Say, for example, you are looking at trading the September 2020/ Perpetual futures spreads, If you are buying this spread you will be buying the Sept 25 futures and selling the Perpetual futures.


So for example if you are looking at futures spreads in BTC and you buy 100 Sept 25/Perp futures spreads for $100, you will be long (+) 100 Sept 25 futures and short (-) 100 Perp futures for a price difference of $100:


+100 Sept 25 futures @10100

-100 Perp futures @10000


Why would you do this trade?


As a speculator, you would buy this spread at $100 because you believed the spread is cheap and could increase in value. Conversely, you would sell this spread if you think that this differential is going to reduce in your favour.




When the longer dated futures are priced higher than nearer dated futures (or spot) then this is known as contango markets. In crypto markets in recent times the futures markets have generally been in contango. This is generally a sign than leveraged traders are bullish on future prices of BTC.




When longer dated futures are priced lower than short dated markets (or spot) then this is known as backwardation markets. This is generally a sign that leveraged traders are bearish.




Flatteners is a term used to describe what you would like to trade with futures spreads to reflect what you think might happen on the futures market (or curve). If the longer dated futures are in contango (see description of contago above) and you think that the price of this difference will go towards zero (so in our example from $100 to say $20) then you sell the Sept 25/Perp futures spread and this trade is known as a “flattener”




If you think the Sept 25/Perp futures spreads are going to increase in value, say from $100 to $150, then you will buy the futures spread and this type of trade is known as a “steepener”.


Spread Order Books


CoinFLEX’s spread order books are a direct way to place orders on this example of the Sept 25/Perp spreads. There are different ways that prices and orders will be trade in this book:

  1. Direct spread orders: here you can place spread orders manually or via api’s.

  2. Implied in orders: these are where prices from the individual Sept 25 futures and/or the Perp futures get shown into the spread order book as these individual order books contain the individual contracts that make up this spread.

  3. Implied out orders: these are where prices from the spreadbook get shown in the outright Perp and/or Sept 25 individual futures books as again the Sept 25/Perp spread book contains the same contracts.


Why do you have implied orders?


Implied orders are really useful because this means that liquidity from the outright individual futures books are reflected in the spread book (“implied in”) and spread orders’ liquidity are exported out to the individual futures books (“implied out”). Both of these reflect liquidity from one or more books and shows them in associated books that involve the same contract. It means lots of linked liquidity and the CoinFLEX matching engine will show implied in or out futures to help get your orders filled whether you are working outright or spread orders.


Who trades spreads


Directional traders – Futures spreads are a really popular day trading strategy in traditional markets (on CME, ICE, SGX) because they are less volatile than trading outright direction with futures and can be extremely mean reverting on average days and so individual traders can trade much bigger size in a more risk-controlled way and compete fairly with the large market makers in crypto.


Commercial traders & commercial users may use futures spreads to hedge future positions that they anticipate having due to the nature of their business. Typically they will start with a position in an outright futures market and will manage or roll this position with futures spreads. A good example of these are crypto miners. They know that they will be producing 100 coins by the end of Sept so they sell 100 Sept physical futures. But then when they get to the end of Sept 25 they can sell the BTC mined as spot contracts and hedge the next quarters position by selling the futures spreads that cover the next quarters production.




Futures spreads on CoinFLEX are portfolio margined. This means that being long the Sept 25 contract and short the Perp contract are margined as one trade and you will get margin offsets for spread positions. This lets you trade with higher leverage than with outright futures. On CoinFLEX you can have 200x leverage for example. As liquidity builds up on the spread books, we will be introducing a lot more offsets/margin relief so that you can be even more efficiently margined.




What makes futures spreads move?


The main factors that make futures spreads in crypto move are directional traders’ views on what will happen in the future. If traders or investors believe that BTC might rally in the next few weeks, then directional leveraged traders will tend to buy the further dated futures. If this happens then you expect the market to steepen (more contango in the market) and so you would hold a long position in the futures spreads.


Spread prices can also move quickly at times so you will also be at risk of liquidation, so you have to bear this in mind when sizing your position. In the traditional space, due to the risk of overnight gap risk, spread traders tend to size down or close spread positions when going offline.


On CoinFLEX, all our futures spreads will have the perpetual swaps as the base contract irrespective of the Coin you trade. So in BTC for example, if the contracts that are listed are perpetual swaps and the next quarter futures, then the spread book will be the quarterly future/perpetual swap spread.


The perpetual swap will either receive or pay funding, so you also have to watch the funding on this contract as it could either slightly enhance or decrease your returns from holding the spread position. You can of course trade out of the spread position ahead of the funding period and then re-enter the position after but of course the spread price might have moved.