Spread Trading in Crypto

Spread trades are usually entered to capture a market inefficiency, if a trader believes a future is mispriced against another, they can buy and sell each future to capture the ‘spread’. If the market is efficient, then in time the spread should converge from where you entered and thus realising a profit.

What is Spread Trading?

Types of Spreads

Calendar Spread

A calendar spread is an options or futures strategy established by simultaneously entering a long and short position on the same underlying asset but with different delivery dates. In a typical calendar spread, one would buy a longer-term contract and go short a nearer-term option with the same strike price.

Conventional Spread

Spread trades are the act of purchasing one security and selling another related security as a unit. Usually, spread trades are done with options or futures contracts. These trades are executed to produce an overall net trade with a positive value called the spread.

How to price a spread

It is first important to understand that a spread price consists of 2 legs, these are the two products in which you are trying to capture a spread between.

For example:

In the below scenario we have two legs of a spread defined.

Leg 1: Binance:BTCUSDT @ 20,000
Leg 2: Coinbase:BTCUSDT @ 21,000

‍Spread Price: (Leg 1 - Leg 2) = 1,000

The difference between leg 1 and leg 2 is the relative spread price. In this example we are entering a spread trade under the assumption that the 1,000 difference is not normal, and we expect this to converge towards 0 over time.To enter the spread trade we would buy Binance:BTCUSDT and sell Coinbase:BTCUSDT. On the contrary if we think the spread is going to widen further then we can do the opposite.

Trading the spread intraday

Now that we know how to price a spread we can start to talk about how to actively trade this intraday. During high market volatility we start to see lots of dislocations between the expected difference in contract pricing against unexpected pricing.

For example we might see that during vol Deribits BTC-PERPETUAL will deviate from its usual spread price against Binance's perp. This could be due to Deribit having less liquidity, thus dislocating further in price during vol. Now that we know that this can happen we can actively trade that spread price between Deribit and Binance, by both longing the spread and shorting it.To effectively trade spread deviations intraday can be difficult if manually executing each leg, the key to capturing a spread is to execute both legs at the same time.

Executing the spread via our Auto-Spreader

Alpha provides traders with a means to overcome the problem of speed when entering a spread trade. Usually these opportunities are only available for seconds, therefore making it paramount to enter before other market participants eat up the spread.The auto spreader allows a trader to load up both legs of a spread between any product on any exchange. The spreader provides at a single click the ability to either long the chosen spread or short it. You can see the spread being priced live to the tick, you can choose to either price this in a relative or absolute convention. You are able to specify separate quantities to execute on each leg or otherwise execute the same quantity into each leg. Once you have executed alpha will send out orders to the relevant locations at the same time to capture the spread instantly.

How do we calculate our spreader pricing?

As mentioned previously in the insight we talked about the basic concept of comprising a spread price, put simply we said that it was (leg 1 - leg 2). However there is a further level to consider here to show accurate pricing, that being the bid and ask.

When executing we should think in the sense of which part of the orderbook are we hitting, and so which part should we price against. Say we are buying in leg 1 of our spread, we would need to price that against the best ask. If we are selling in leg 1 then we would be pricing against the best bid. Below you can see our pricing conventions in terms of bid and ask.

Buying Spread: