A 16.58% ETH rally with no funding data strains the perpetual short leg
Should a basis trader keep the equal perpetual short at full size while ETH gains 16.58% in a week with no funding data, or cut it so the short leg can absorb another 5.86% hour?
The market facts are real; the decision maker is illustrative.
The week and the position
In the week of 4 February 2019, ETH rose 16.58%, from 107.33 to 125.12, with a range of 24.98% and a close in the upper third of that range. The best day, 8 February, gained 14.14%, and the largest hourly move, 5.86%, came late in the UTC day that Friday. ETH beat BTC by 10.16 percentage points and the ETH/BTC ratio rose 9.54%. Perpetual funding rates are unavailable for the week, so an illustrative basis trader holding spot plus an equal perpetual short cannot measure its carry, and three of the prior four weeks were down.
Judgment
This trade's economics rest on funding, and funding is not reported here, so the short leg absorbed price loss against a week whose largest hour alone was 5.86% while spot gained. Keep the spot leg, but reduce the perpetual short to a size its margin survives at that hourly pace, and hold the spot where it can be moved to that margin quickly. Treat the trade as carry whose income cannot be confirmed until funding is observed again.
What would change it
If funding data returns and shows a positive average large enough to cover the short leg's price loss, the full equal size can be restored. If a further week closes in the upper third of its range, the short size should be cut again rather than restored.
What sets this case apart
This case turns on the absence of the funding data that justifies the trade, during a week the short leg lost against a close near the high.