Hybrid Spreads Introduction
What is OKX Hybrid Spreads within Nitro Spreads?
On Nitro Spreads, a product OKX offers under its Liquid Marketplace offerings, you can trade spreads between two different instruments with atomic execution, meaning that either both legs will execute, or neither will. Further details on Nitro Spreads can be found here: https://www.okx.com/help/how-does-futures-spread-trading-work-on-okx-liquid-marketplace
Hybrid spreads simplify this for you by allowing you to trade spreads between two legs with different margin currencies from a single order. Margin currency refers to the coin required to post as collateral to hold a position in the contract.
What is an example of a “Hybrid Spread”?
One of the most popular trading strategies is the funding rate arbitrage. A trader would simultaneously enter opposite direction positions on the spot and the perpetual futures contract to collect the funding rate from the perpetual futures.
On OKX, one of the most liquid perpetual futures contract for BTC is the BTCUSDT Perpetual Futures. Meanwhile, OKX also offers BTCUSD Perpetual Futures. The key difference is BTCUSDT requires users to margin the position with USDT balances, whereas BTCUSD requires BTC balances. Let's explore a scenario where a user chooses to use the BTCUSD instrument instead of the BTCUSDT.
Building a hybrid funding rate arbitrage strategy
Long position in spot market
Buy 1 BTC with USDT in the spot market. Let’s assume the current price of 1 BTC is $60,000.
Short position in crypto-margined perpetual futures market
Sell 1 BTCUSD Perpetual using BTC as margin. You enter into a short position in a perpetual futures contract margined in BTC. This means that your margin, the currency you’re holding as collateral, is in BTC.
Funding rate mechanism
Let’s assume the funding rate is usually paid to holders of short perpetual position.
Assuming the short position holders are currently being paid a 40% funding rate.
This rate is expressed and paid out every eight hours for both BTCUSDT and BTCUSD Perpetual futures.
Calculating the daily funding fee payment
If the annual funding rate is 40%, the daily funding rate would be 40% / 365 ≈ 0.1096%.
Since your short position is margined in BTC, your funding fee will be paid out in BTC.
For a position size of 1 BTC valued at $60,000, the daily funding fee payment is 60,000 × 0.001096 ≈ $65.76 worth of BTC. The exact amount of BTC received depends on the BTC/USD index.
Considerations
Market risks
If the price of BTC increases, your spot position gains in value, ideally offsetting losses on the short futures position, minus the funding rate benefit.
If the price of BTC falls, losses on the spot position need to be closely monitored, as they might outweigh the gains from the funding rate, especially considering that both your long spot and short futures positions are inherently exposed to BTC’s price volatility.
Please note that basis trading is still subject to volatility & market conditions; traders need to monitor their margin requirements regardless of which execution method they choose.
Settlements and adjustments
Regular monitoring and potential rebalancing of the margin requirements for the futures position are crucial, particularly because the margin is in BTC. Any drop in BTC price can lead to margin calls or a need to top up the margin.
Summary
You profit from the funding fee payments in BTC for holding the short position in the futures market.
You hedge market exposure to BTC’s price volatility by holding an equivalent long position in the spot market.
You profit most when BTC’s price is stable or rising, and you keep receiving positive funding fees. If your prediction about the funding rate is wrong, you’ll face a loss. This loss increases if BTC’s price drops because you’ll need more BTC to maintain your Margin Requirement.
This type of strategy involves close attention to and careful rebalancing based on market movements and funding rate adjustments, emphasizing the importance of risk management and frequent monitoring.
Where can I do this on OKX?
Traders on OKX typically have 3 options of execution for this 2-legged strategy.
Regular OKX order books
Traders can place orders in each of the corresponding markets through OKX app, website, or API.
There are trading bots that can simplify the order execution: https://www.okx.com/trading-bot/arbitrage.
Note: There are no guarantees for atomic execution in the regular order books. You might enter into one leg of the trade but not the other.
RFQ
Traders can request a quote by selecting the required legs and sizes of the trades on the RFQ Platform in Liquid Marketplace
Note: The minimum trade size for RFQs involving derivatives requires a trade notional of more than 50,000 USD equivalent and an AUM of at least 10,000 USD equivalent.
Nitro Spreads
Traders can, instead of option 1 or 2, simply take liquidity from Nitro Spreads’ always-on order books with its own dedicated liquidity and enjoy a 50% discount on the trading fees.
Note: Traders are required to have a minimum AUM of 10,000 USD equivalent. But there are no requirements for the trade size and the minimum order size is typically under $1,000 USD equivalent.
Wherever you prefer to execute, OKX strives to provide multiple avenues for execution, catering to both systematic trading firms and discretionary individual traders alike.
Understanding OKX Hybrid Spreads
Margin and settlement currency implications
Hybrid spreads will require users to margin with at least 1 of these assets:
BTC
ETH
USDT
It is important to note the direction of the execution to determine which leg will require which asset balance to margin with.
If users do not have the requisite asset required to margin (as with trading in OKX in general), users will be required to borrow said assets
A trader’s existing margin settings will apply for Nitro Spreads, whether they are in multi-currency margin mode or portfolio margin mode. To learn more about the different modes, please refer to PDF: Multi currency margin vs Portfolio margin
Quote currency implications
Crypto-margined contracts and their USDT-margined equivalents share different underlying indexes. As such, the quote and mark currency symbols of the two contracts are different.
As the USDT-margined derivatives on OKX are also priced in USDT, should a depeg scenario of USDT/USD occur, clients could face a significant loss if they entered the trade without hedging USDT/USD risk appropriately.
In order to place hybrid spread orders, Nitro Spreads’ order management system makes no assumptions about the USDT/USD rate, rather it reads directly from the published rate, which is available through API and OKX website. Traders can refer to the index constituents here: https://www.okx.com/markets/index/usdt-usd
When a trader places a limit order for hybrid spreads, their end-to-end execution scenarios can be understood at a high level with this excel sheet: Hybrid Spreads Execution Logic
This document is provided for informational purposes only and is not intended as financial advice, investment recommendation, or an endorsement of specific trading strategies. The contents of this document, including but not limited to any graphs, charts, and numerical data, are provided “as is” without warranty of any kind, whether express or implied. The cryptocurrency markets are highly volatile and subject to market risks. The strategies, opinions, and analyses included in this report are based on information available at the time of writing and may change without notice. They are also based on certain assumptions and historical data that may not be accurate or applicable in the future. Therefore, reliance on this report for the purpose of making investment decisions is at your own risk.
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