LESSON 10 · NOTES · PRACTICAL TRACK, LESSON 2

Spot-Spot with a Hedge: How to Make the Transfer Between Exchanges Not Your Problem

While a coin is traveling between exchanges, you are long, and the price can move more than your entire spread. We’ll work through the numbers to show how a perp short removes that risk, what the hedge costs, and what it doesn’t remove.

Three takeaways

1. In spot-spot, the hedge is a perp short held for the duration of the transfer. Five steps: buy, short, transfer, sell, close.

2. The hedge removes price risk, but not spread risk. The outcome depends on the gap between exchange B’s spot and the perp at the moment you exit.

3. The hedge isn’t free. Perp fees, funding and margin for the short: all of it is calculated in advance, for every pair.

1. Where people lose: transfer time

You buy on exchange A and send the coin to exchange B to sell it higher. While the coin is in transit, you have one leg: delta is plus one, you are long (lesson 9). A transfer usually takes a couple of minutes, but it can take half an hour or longer. Transfer time is not a cost with a fixed amount, it is a risk: the spread can narrow, disappear, turn negative or widen, and the coin’s price can move more than the entire spread.

Example: a 2.5% spread at entry, the transfer gets stuck for 40 minutes, and the coin drops 10% in that time. Result after fees: −7.8%.

2. Five steps of the hedge

For the duration of the transfer, we add a second leg: a short on the perp. Long spot +1, short perp −1, delta zero.

1. Buy the coin on exchange A’s spot market, where it’s cheaper.

2. Immediately open a perp short for the same number of coins. Count in coins, not dollars.

3. Withdraw the coin to exchange B.

4. Sell the coin on exchange B’s spot market, where it’s more expensive.

5. Close the short at the same moment. Both legs are closed together.

The short lives exactly as long as the coin is in transit. The exchange charges the withdrawal fee in coins: you bought 1,000, the fee is 1 coin, 999 will arrive. Open the short for the amount that will actually arrive.

Multiple rounds. If the spread between the exchanges hasn’t disappeared after you sell on exchange B, you don’t need to close the short. At the moment you sell on exchange B, you buy coins again on exchange A in parallel: the coins you sold are replaced by the ones you bought, the position stays delta-neutral, and the short keeps hedging the new batch in transit. Repeat round after round until the spread dries up. You close the short only in the last round, together with selling the coins on exchange B.

For this, you need dollars on exchange A for each new purchase: the proceeds from the sale stay on exchange B. And while the short is open, funding accrues on it — factor that into the result too.

3. The math

A hypothetical coin: spot A $10.00, perp $10.00, spot B $10.25. The spread is $0.25 per coin, or 2.5%. We buy 1,000 coins on spot A for $10,000 and short 1,000 coins on the perp at $10.00. While the coin is in transit, the price moves by a dollar everywhere, and the spread between the exchanges stays the same.

Wherever the price goes, the result equals the spread at entry. Now the costs:

Result with a 10% price drop: with the hedge +$210 (+2.1%), without the hedge −$780 (−7.8%). Same trade, same transfer, same drop.

4. What the hedge doesn’t remove

1. The spread between spot B and the perp at exit. You sell on exchange B and close the short on the perp. If the price on exchange B has caught up (spot B $9.05, perp $9.00), then spot −$950, short +$1,000, together +$50, about +$10 after costs. If spot B ends up below the perp, you’ll be in the red. Transfer time is still a risk, only now it’s spread risk rather than price risk.

2. Liquidation of the short while the coins are in transit. Usually margin is topped up from spot on the same exchange (lesson 8), but in a hedge there are no coins left on spot. Size the margin for the short with a buffer: lower leverage or a dollar reserve in the futures account, before you enter.

3. Funding. On calm coins it costs almost nothing over 40 minutes, and with a positive rate the short even receives it. On coins with large spreads it can be heavily negative and paid every hour rather than every 8 hours. Check the rate and the interval before entering.

4. There is no perp, or its order book has no volume. Large spreads often persist exactly where there’s nothing to hedge with. If there is a perp, a short for your size must open without slippage (lesson 3).

5. Withdrawals are closed. The hedge holds the position and the price doesn’t affect you, but every hour of waiting costs funding and ties up margin. Decide in advance how long you’re willing to wait and how you’ll exit: sell the spot and close the short on the same exchange.

5. When the hedge pays off

The hedge costs money (two extra trades on the perp plus funding) and requires more capital. $210 on $10,000 is 2.1%. With margin for the short at ×3 leverage, capital is about $13,300, and the return drops to about 1.6%.

Without a hedge, with a long transfer and a volatile coin, it’s a bet on price, not arbitrage. There’s only one answer: calculate in advance, for every pair.

Exercise

Five minutes, not a single dollar. Open the hedge calculator (linked on this lesson’s page; it works in Telegram, along with the delta calculator from lesson 9). Pick a coin that has spot on two exchanges and a perp. Enter real prices, your exchanges’ fees, the withdrawal fee in coins and the usual transfer time on your network. Find two numbers: the minimum spread below which the trade loses money even without any price move, and the exit-spread margin up to which the hedged result is still positive.

Terms

• Hedge: an opposite position that offsets the risk of the main one. In spot-spot, it’s a perp short held for the duration of the transfer.

• Perp (perpetual futures): a futures contract with no expiration date. Its price stays close to spot thanks to funding.

• Short: a position that profits when the price falls.

• Leg: one of the positions in a pair. Spot-spot with a hedge has two legs: long spot and short perp.

• Funding: periodic payments between longs and shorts on a perp. Positive: the short receives; negative: the short pays.

• Margin: money in the futures account that backs a leveraged position.

• Liquidation: the exchange forcibly closing a position when the margin isn’t enough.

• Exit spread: the gap between the spot price on exchange B and the perp at the moment the trade is closed.

• Minimum spread: the entry spread at which the trade breaks even after all costs.

Check yourself

Why are you effectively long in a regular spot-spot trade with a transfer?
While the coin is in transit, you have one leg, delta plus one. A price drop eats the spread.

How many coins should the short be for if the withdrawal fee is charged in coins?
The amount that will arrive at exchange B: the coins bought minus the withdrawal fee.

The price fell 10% during the transfer. Why did the hedged result barely change?
The loss on the spot leg was offset by the profit on the short. The result equals the entry spread minus costs.

What risk remains even with a hedge?
The spread between exchange B’s spot and the perp at the moment of exit. Plus liquidation of the short, funding and closed withdrawals.

Why is margin for the short sized with a buffer in a hedge?
The coins are in transit, so there’s nothing on spot at the same exchange to top up the margin with.

Next lesson: spot-perp. A strategy with no transfer between exchanges, where funding does the work instead of time.

This material is for educational purposes only and is not investment advice. You make all trading decisions on your own and at your own risk.