Solana (SOL) futures contracts are so incorrect that the arbitrators earn an annual interest rate of 23% in exchange for institutional reliability and liquidity worth millions of dollars.
Yesterday, the October SOL expired monthly CME futures contract was trading at a 2.8% premium. This has resulted in substantial yields for the two-legged trade.
A certain type of mispricing is contango. This is anomaly when the asset’s futures price is higher than the spot price expected at the expiration of the contract.
To illustrate this, consider the simultaneous prices of Sol Futures and Spot Sol on CME in October, one arbitrageur captured yesterday. $237.60 and $230.97 respectively.
If arbitrageur is uninterested in Sol’s prices and simply wants to rely on the market to lock in dominated yields, it is possible that he has bought a spot to shorten his October futures contract and offset the entire position.
Capturing the above contango will earn 2.8% after 1.5 months. Unless the CME was unable to resolve these futures contracts, it may not have failed to resolve futures contracts since 1976, but there is little institutional risk to selling these futures contracts.
Other risks of arbitrating Solana futures
Of course, prior to October 31st, futures contract prices could continue to rise. While contracts are guaranteed to expire on spots and parity, Contango can last and even grow before its expiration date.
CMEs are contractually subject to future prices and always resolve correctly at expiration dates, while free markets place daily prices.
Therefore, investors for short of positions against them move their positions are responsible for posting additional margins in response to the broker’s request.
The above arbitrageur opened a conceptual position of $100,000 using a 40% margin as a realistic illustration or $40,000.
If the price of Sol or its futures rises by 10%, that $100,000 conceptual position changes to a $110,000 position, triggering a $4,000 margin call to arbitrageur.
In any case, with the expiration date of October 31st, the futures contract will return 2.8% or $2,800 for any conceptual position.
Of course, to be conservative, the above arbitrageur assumed that future traders would take weeks to post collateral and time entries and exits, so they took into account only one month’s holding time and reduced Contango modestly from 2.8% to 2.5%.
A monthly return of 2.5% per year is recalculated to a return worth $30,000 per year, with a 40% margin requirement recalculated to an annual return of $100,000.
In the other leg of the trade, arbitrageur simply bets by buying a spotsol. Assuming an equal $100,000 spot position to offset the $100,000 conceptual short futures position, that stake position would earn around $6,300 after a 12-month stake.
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Putting it all together, arbitrageur would have made $30,000 and $6,300 in a $140,000 position. This assumes that 2.5% of Contango recurs each month in monthly CME futures contracts. Also, Contango didn’t significantly worsen 2.5%, which requires a stock trading margin of over $40,000.
Both of these are quite assumptions.
Nevertheless, the $36,300 return on $140,000 is an annual revenue of 25.9%. As arbitrageur pointed out, after fees and fees, it could clear 23% in USD each year.
At the time of publication, CME Sol Octure Futures’ Contango fell to 0.4% and fluctuated to 1.8% during the writing process. The cut from 2.8% is good news for arbitrators who were short on yesterday, but bad news for those looking to join in today’s deal.
These fluctuations are normal in aggressively traded markets.
For arbitrators seeking to maximize yields and achieve above average returns each year, false priced patients bidding between correlated markets is part of the job.