Cash and Carry Strategy

Cash and carry is a classic arbitrage strategy where you simultaneously buy an asset in the spot market and sell (short) it in the futures market. The profit comes from the difference between the futures price and spot price, known as the basis.

In traditional markets, this strategy has been used for decades with commodities and financial instruments. In crypto, it applies to both delivery futures (which expire) and perpetual futures (which use funding to maintain price alignment).

The strategy is called "cash and carry" because you hold cash in the form of the actual asset (spot) while carrying a short futures position against it.

Step 1: Identify a futures contract trading at a premium to spot. This premium represents your potential profit.

Step 2: Buy the underlying asset in the spot market. This is your "cash" position.

Step 3: Simultaneously short the futures contract for equivalent notional value. This is your "carry" position.

Step 4: Hold until the futures contract expires (for delivery futures) or until the basis narrows to an acceptable level (for perpetuals).

Your profit is the initial basis minus any trading costs, funding payments (for perpetuals), and execution slippage.

With delivery futures, the profit is more straightforward: you capture the entire basis at expiry when spot and futures prices converge.

With perpetual futures, there is no expiry date. Instead, you capture ongoing funding payments when funding is positive (longs pay shorts). However, the basis can fluctuate, creating mark-to-market variance.

Delivery futures are often preferred for pure cash-and-carry because of price convergence at expiry. Perpetuals are more flexible but require active monitoring.

Execution risk: entering and exiting both legs simultaneously is challenging. Slippage on either side reduces profits.

Liquidation risk: even with a hedged position, extreme volatility can cause margin calls on the futures side before you can rebalance.

Basis risk: with perpetuals, the basis can move against you temporarily. With delivery futures, early exit means uncertain profit.

Counterparty risk: exchange insolvency or technical issues could impact your ability to manage positions.

Capital efficiency: your capital is locked in both the spot position and futures margin, reducing overall efficiency.