BitMEX uses the following industry-standard month codes to name its instruments. These are the same as those used on NYMEX, CME, and all other major derivatives exchanges. When present, the month code signifies the delivery month of the future.
A market where the futures contract is trading at a premium is referred to as a Contango market. Conversely, a market where the futures contract is trading at a discount is referred to as a Backwardation market. Note that, all things being held equal, the basis approaches 0 as the futures contract approaches expiry. Given this point, a trader can use this as a trading strategy: a futures contract trading at a large premium can be sold and the underlying asset bought so that the trader is market neutral and will thus earn the basis if they hold till settlement. The below chart shows both a contango and a backwardated market.
Given the uncertainty of where the contract will finally settle, the basis can fluctuate significantly and a trader needs to be aware of where it is currently trading at. To avoid unnecessary liquidations with a fluctuating basis, BitMEX employs a method called Fair Price Marking to ensure the futures market is marked fairly.
BCHZ20 is a futures contract for Bitcoin Cash (BCH). Traders can speculate on the price of Bitcoin Cash at the Settlement Date. The Initial and Maintenance Margin is 5% and 25% respectively, meaning a trader can trade up to 20x leverage and liquidation will occur if the trader’s margin level drops below 2.5%. The Settlement Procedure occurs over a 30-minute TWAP prior to expiry.
The specific Contract Calculations are as follows:
|XBT Contract Value
||Multiplier * Futures Price * 1 BCH
|USD Contract Value
||XBT Contract Value * XBTUSD
||# Contracts * Multiplier * (Exit Price - Entry Price)
Let’s consider a market where it is Monday at 12:00 UTC, the underlying spot market is trading at 0.0200 XBT and the BitMEX BCHZ20 futures contract is trading at 0.0220 XBT.
Firstly, let’s calculate what the basis is trading at. There are 4 days remaining on the contract. The nominal basis is (Futures Price - Spot Price) = 0.0220 - 0.0200 = 0.00020 XBT. The nominal % basis is (Futures Price / Spot Price) - 1 = (0.0220 / 0.0200) - 1 = a 10% premium.
This is equal to 10% / 4 days = 2.5% per day, or 912.5% annualised. This means that if the contract always traded at a 2.5% premium every day, then a trader could theoretically earn 912.5% each year. Why would the contract be trading at such a high premium?
This could be for several reasons: the underlying market is illiquid on the offer side, there is a short term price discrepancy on the futures market, or the market is more bullish in general on the future value of BCH.
How would the trader take advantage of this premium and lock in the basis? The trader could short or sell the contract at 0.0220 XBT, and at the same time go long or buy BCH on the spot market at 0.0200 XBT.
On BitMEX, one contract of BCHZ20 represents 1 BCH (the multiplier). Hence, the trader will buy and sell the same BCH amount on both markets. Let’s say that they want to trade 100 BCH. Then they will buy 100 BCH on the underlying spot market and sell 100 contracts of BCHZ20 which represents 100 BCH.
The trader would then wait until the markets reverted to the same price, or they would wait until settlement. In this example, the market kept trading at a premium up until settlement at 12:00 UTC on Friday and the trader chose to wait until settlement to close out the positions.
At 12:00 UTC on Friday, the 30-minute TWAP Settlement Price was equal to 0.0150 XBT and the underlying spot price was also 0.0150 XBT. Hence the trader lets his futures contract position expire at the settlement price and then close out his 100 BCH buy on the underlying spot market by selling 100 BCH at 0.0150 XBT.
The trader’s PNL on the futures contract is: -100 * 1 * (0.0150 - 0.0220) = 0.7 XBT
The trader’s PNL on the underlying spot position is: 1000 * (0.015 - 0.0200) = -0.5 XBT
Thus the trader’s net PNL for this particular Basis trade is: 0.7 XBT - 0.5 XBT = 0.2 XBT. The trader however knew this already when they put on the trade because they effectively locked in the nominal basis of 0.0020 XBT at 100 contracts. Hence 100 * 0.0020 = 0.20 XBT.