Hedged Basis refers to a trading strategy or position where the risk associated with a primary asset is mitigated by taking an offsetting position in a related derivative or another asset. The objective is to minimize exposure to price fluctuations, isolate specific risk factors, or lock in a specific profit margin. In crypto, this often involves futures, options, or perpetual swaps.
Mechanism
Hedged basis operates by establishing a long or short position in a spot crypto asset while simultaneously taking an opposite position in a futures contract or a combination of options on the same asset. The mechanism aims to lock in a profit margin or reduce market price risk by neutralizing the directional exposure. For instance, a trader holding spot Bitcoin might sell Bitcoin futures to hedge against a price decline, profiting from the basis spread between spot and future prices. The strategy relies on the convergence of spot and futures prices at expiration.
Methodology
The strategic approach to hedged basis in crypto options and futures trading involves calculating and managing the “basis”—the difference between the spot price and the derivative price—and executing trades to capitalize on its expected convergence or divergence. This framework necessitates constant monitoring of market spreads, funding rates (for perpetual swaps), and volatility. The methodology is employed by institutional traders to reduce inventory risk, arbitrage pricing discrepancies, or generate yield with reduced directional market exposure, thereby enhancing smart trading capabilities.
We use cookies to personalize content and marketing, and to analyze our traffic. This helps us maintain the quality of our free resources. manage your preferences below.
Detailed Cookie Preferences
This helps support our free resources through personalized marketing efforts and promotions.
Analytics cookies help us understand how visitors interact with our website, improving user experience and website performance.
Personalization cookies enable us to customize the content and features of our site based on your interactions, offering a more tailored experience.
