Basis Trading: Spot + Perp Hedge

Understanding the Basis

The basis is the difference between the perpetual futures price and the spot price of an asset. When the perp trades above spot, this is called contango — the basis is positive. When the perp trades below spot, it is backwardation — the basis is negative.

In crypto, contango is the norm during bullish conditions. Traders are eager to go long with leverage, pushing perp prices above spot. This premium is your opportunity.

The Cash-and-Carry Trade

A basis trade (also called cash-and-carry) locks in the current premium by taking offsetting positions:

1. Buy spot (you own the asset)
2. Short perp for the same size (you are short the premium)

When the basis eventually converges toward zero, you close both legs and capture the difference.

Example: BTC spot is at $60,000. The perp is trading at $60,450 — a 0.75% premium.

• Buy 1 BTC spot at $60,000
• Short 1 BTC perp at $60,450

If the basis converges to zero:

• Spot position: $60,000 (unchanged at convergence point)
• Short perp PnL: $60,450 - $60,000 = +$450
• Gross profit: $450 on $60,000 capital = 0.75%

If this convergence happens within a week, annualized that is roughly 39% APY — before fees and funding income.

Calculating the Basis Premium

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Basis (absolute) = Perp Price - Spot Price

Basis (%) = (Perp Price - Spot Price) / Spot Price x 100

Annualized Basis = Basis (%) x (365 / expected_days_to_convergence)

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Only enter trades where the annualized basis exceeds your target return after accounting for trading fees, slippage, and margin costs. A reasonable minimum threshold is 10-15% annualized.

Step-by-Step Execution

1. Identify the opportunity. Screen multiple perp DEXes for assets trading in contango. Look for basis premiums above 0.3%.
2. Size the trade. Determine your total capital. Allocate roughly 60-70% to spot and 30-40% to perp margin (at 2-3x leverage).
3. Enter simultaneously. Buy spot and open the perp short as close together as possible. Use limit orders on both sides.
4. Record your entry basis. Document the exact premium captured: entry perp price minus entry spot price.
5. Monitor daily. Track the basis premium. Collect funding payments on the short leg (bonus income in contango).
6. Unwind when basis narrows. When the premium drops below 0.05% or turns negative, close both legs.

Unwinding the Trade

Closing a basis trade requires the same discipline as opening it:

• Sell the spot position and close the perp short simultaneously
• If the basis has converged to zero, your perp short profit equals your original premium captured
• If the basis has gone negative (backwardation), you profit even more — the short earns beyond the original premium

Example unwind: You entered at 0.75% premium. The basis is now -0.1% (slight backwardation). Your short earns the full 0.85% swing, plus all accumulated funding payments.

Risks and Considerations

• Basis can widen before it narrows. If contango deepens from 0.75% to 1.5%, your short is temporarily underwater. This is mark-to-market risk, not a realized loss — but it strains margin.
• Liquidation risk on the short leg. A BTC rally from $60,000 to $70,000 puts significant pressure on your perp short margin.
• Opportunity cost. Capital is locked until convergence. If the basis remains wide for weeks, your annualized return drops.
• Slippage on entry and exit. Especially on DEXes with lower liquidity, large orders can move the price and erode the captured premium.