Cash-and-carry trade
How do traders pocket the gap between a market's cash price and its derivative price, and what does that gap reveal?
In plain words
A cash-and-carry trade buys an asset at its cash (spot) price and simultaneously shorts a derivative that promises to deliver it later, when the derivative trades above spot. The trader holds both until they converge, keeping the difference as a return, minus costs.
Why it matters
The trade earns the gap rather than betting on direction, so a price rise or fall matters less than convergence. It needs capital for both legs and can lose if the derivative stays rich or funding costs eat the gap.
In a real week: BTC, week of 29 March 2021
In the week of 29 March 2021, BTC rose 4.35% to 58202.01, and funding for holding long perpetuals was positive throughout, averaging 0.0632% per eight hours, peaking at 0.1093% and bottoming at 0.01%. That funding is what a cash-and-carry trader earns from the short leg while holding spot.
A common mistake
Assuming the gap is free money. It can narrow, vanish or reverse before expiry, and margin on the short leg can be called during sharp moves.