Strategy 03 · Derivatives
Basis and Carry
Convergence you can hold to.
A dated future must equal spot on the day it expires. Before that day it usually trades above spot, because holding a levered long through a future is cheaper and more convenient than borrowing to buy the asset. The gap is the basis. Buying spot and selling the future locks it in; the position earns the basis as the two prices converge, whatever the asset does in between.
Term structure
Futures of different expiries trade at different premiums, and the curve they form is the market’s implied cost of leverage over time. A steep curve means the market is paying a lot to be long far out; a flat or inverted curve means it is not. The strategy reads the curve to decide which expiry to sell against spot, and whether a perpetual, whose funding is the same premium paid continuously, offers a better rate than any dated contract.
Holding to expiry versus rolling
A basis position held to expiry realizes the premium captured at inception, with no further market dependence. Rolling (closing the expiring contract and opening the next) lets the position run indefinitely but re-exposes it to whatever basis prevails at the roll. Wesvel rolls when the curve pays for it and lets positions expire when it does not.
Basis can widen first
Convergence is certain only at expiry. Before that, a basis position marks to market: if the premium widens after entry, the short future shows a loss and requires more margin, even though the eventual outcome is unchanged. The strategy carries margin headroom for that widening, and treats it as a liquidity cost rather than a reason to exit.
Practice
How Wesvel approaches it
- 01Positions are sized to survive the widest basis observed on the contract, not the basis at entry.
- 02Expiry selection is made from the full curve and the perpetual funding rate together, on a net-of-cost basis.
- 03Spot legs are held in custody; futures legs are margined at venues within counterparty limits, with tokenized Treasuries posted where permitted.
- 04Roll decisions are rule-based and logged, and the book is never forced to roll into an unattractive curve by a maturity concentration.
More in Derivatives
- Hedging Spot ExposureUsing short futures to neutralize unwanted price exposure on positions held for yield.
- Relative ValueTrading differences in funding, basis and term structure across venues, assets and expiries with limited net direction.
- Options and VolatilityHow options are used in the book, for asymmetric hedging, for carry on implied volatility, and for expressing views on how much markets will move.