Delta-Neutral Trade Example

Consider the following example where a trader executes a 100 ETH basis trade. The trader will purchase 100 ETH spot, and sell 100 ETH linear perpetual futures:

Time	Event	Close Price Spot	Close Price Perpetual	Spread (Perpetual-Spot)	Long Spot Position UPNL	Short Perpetual Position UPNL	Spread UPNL
T0	Open Basis Trade Initial Spread: +$10	$1,000	$1,010	$10	$0	$0	$0
T+1	Unchanged Spread Price Price increases	$1,100	$1,110	$10	$10,000	-$10,000	$0
T+2	Unchanged Spread Price Price decreases	$800	$810	$10	-$20,000	$20,000	$0
T+3	Spread Discount (Below Initial Spread Entry)	$1,500	$1,495	-$5	$50,000	-$48,500	$1,500
T+4	Spread Premium (Above Initial Spread Entry)	$2,000	$2,015	$15	$100,000	-$100,500	-$500

Since we are Long Spot and Short the Perpetual for equal amounts, whether price increases or decreases (As seen in T+1 and T+2), we are unaffected by the price movement. We are instead exposed now to two factors: Entry Spread vs. Mark-to-Market Basis Spread, and cumulative Funding payments received. Although less meaningful, the difference between where we entered the basis at (e.g. the spread captured between perp and spot) and the current spread, is our unrealized profit/loss.

This Mark-to-Market unrealized loss/gain is only realized in the case that a user requests a redemption at that moment. Over time, this Mark-to-Market loss/gain is buffered by the cumulative funding payments received over time.

To understand this in depth, the following is an example of a trader taken a basis position on the ETH basis (e.g. Long Spot, Short COINM Perpetual Future) for 100 ETH on 01/01/2024. This position will be held for 60 days.

Time	Close Perp	Close Spot	Spread Captured	Funding Payments(ETH)	Dollarized Funding	Unrealized Spread PNL	Total Position PNL (UPNL+RPNL)
2024-01-01 0:00:00	$2,286.09	$2,284.67	$1.42	0.00000	$0.00	$0	$0.0

The position experiences ebbs and flows of unrealized losses/gains as the position is open.

This chart illustrates the oscillations in Unrealized Profit and Loss (PnL) experienced during the lifetime of a basis trade. The initial spread captured at the position's entry was $1.42. As prices move up or down and as demand and supply conditions change, the spread between the spot and perpetual contracts fluctuates. Consequently, the position's Unrealized PnL changes as we continue to hold and farm the funding. Throughout the lifecycle of the trade, market dynamics and spread changes cause the Unrealized PnL to oscillate until the position is closed and the final spread at closing is realized. Notably, the unrealized losses are minimal, peaking at approximately 12 basis points.

What remains consistent, however, are the funding payments we receive. Due to the nature of inverse perpetual contracts, we dollarize the funding payments periodically, which contributes to the total position's PnL over time. This chart highlights the combination of unrealized spread changes and realized funding payments, providing a comprehensive view of the position's performance and alleviating potential anxiety regarding temporary fluctuations in Unrealized PnL.

The positions PnL (including both UPNL and the realized funding payment PNL). Over time, the fluctuation within the UPNL is unnoticeable and immaterial to the NAV.

Time	Close Perp	Close Spot	Spread	Funding Payments(ETH)	Dollarized Funding	Unrealized Spread PNL	Total Position PNL (UPNL+RPNL)
2024-03-01 0:00:00	$3,368.30	$3,365.41	$2.89	2.11627	$5,566.68	$256	$5,822.68

Final Statistics:

Position Size (ETH)	Initial Notional Amount	Days	Total PnL	Annualized Rate
100	$228,609	60	$5,822.68	15.49%