Mastering Spread Trading: A Complete Guide to Pairs Trading Strategy

Spread trading represents a sophisticated approach to capitalizing on price differences between related financial instruments. By simultaneously taking opposite positions in two instruments—such as Spot, Perpetual futures, or Expiry contracts with different maturity dates—traders can execute hedging strategies that reduce directional market risk while targeting specific profit opportunities. This comprehensive guide explores how spread trading works, why traders use it, and how to maximize returns through atomic execution and cost-efficient trading.

Understanding the Core Mechanics of Spread Trading

At its foundation, spread trading involves pairing different types of instruments with varying expiration dates. Common combinations include Spot paired with Perpetual futures, Spot combined with Expiry contracts, Perpetual paired with Expiry contracts, or two Expiry contracts with different quarterly cycles (such as Quarterly versus Bi-Quarterly).

The strategy operates by simultaneously opening two offsetting positions—one long and one short—in equal quantities. For example, if you believe the price gap between a near-term Expiry contract and a Perpetual will narrow, you might sell the distant Expiry (short) while buying the near-term Expiry (long). This delta-neutral structure eliminates exposure to directional price swings; your profit or loss depends purely on how the spread between the two legs changes, not on whether the overall market moves up or down.

The “spread” itself represents the numeric difference between the entry prices of your two legs. If you enter at a spread of -100 and exit at -80, the spread has increased (improved if you’re long the spread). Conversely, if it moves to -120, the spread has decreased.

Why Traders Choose Spread Trading: Key Advantages

Atomic Execution & Certainty

The most significant innovation in modern spread trading is atomic execution—a mechanism ensuring both legs fill in equal quantities or not at all. This eliminates “leg risk,” the nightmare scenario where one position executes while the other fails, leaving you unhedged. When you place a spread order, you know exactly what spread you’re getting; the entry prices for both legs are automatically calculated to match your order price precisely.

Simplified Workflow & Lower Trading Costs

Rather than manually placing two separate orders in the order book—tracking each fill, managing slippage, and paying double fees—spread trading condenses the entire process into a single click. The fee structure reflects this efficiency: expect to pay 50% less in trading fees compared to executing two independent orders. For VIP users, this discount applies on top of existing VIP fee rates, amplifying savings on high-volume activity.

Strategic Flexibility & Hedging Precision

Spread trading unlocks advanced strategies impossible in conventional trading. Traders can execute Funding Rate Arbitrage (profiting from perpetual futures’ periodic funding payments), Futures Spread trading (capturing differences between contract months), Carry Trade strategies, and Perp Basis trading. By offsetting opposite positions, you minimize losses from adverse price movements while maintaining strategic flexibility to adjust individual legs as market conditions evolve.

The Technical Architecture: Terms, Calculations & Execution

Core Terminology

In spread trading terminology, the near leg refers to the instrument expiring first, while the far leg expires later. The ranking from nearest to farthest follows this hierarchy: Spot > Perpetual > near-term Expiry > forward Expiry. When you buy a combo, you’re buying the far leg and simultaneously selling the near leg. The reverse applies when selling a combo.

Your order price is the spread value you specify—the difference between the far leg’s entry price and the near leg’s entry price. This can be positive, negative, or zero. Once you submit an order, both leg entry prices are automatically calculated using the mark prices of each instrument and your specified order price.

Calculation Methodology

The entry price for each leg is determined by these formulas:

• Order Price = Far Leg’s Entry Price − Near Leg’s Entry Price
• Far Leg’s Entry Price = (Far Leg’s Mark Price + Near Leg’s Mark Price + Order Price) ÷ 2
• Near Leg’s Entry Price = (Far Leg’s Mark Price + Near Leg’s Mark Price − Order Price) ÷ 2

This mathematical framework ensures the locked-in spread always matches your order price, providing complete certainty before execution.

Worked Example

Suppose you sell a Spot-Perpetual combo at an order price of $50. The Spot index price stands at $1,000, and the Perpetual mark price is $1,100. Your entry prices would be calculated as:

• Perpetual Entry Price = ($1,100 + $1,000 + $50) ÷ 2 = $1,075
• Spot Entry Price = ($1,100 + $1,000 − $50) ÷ 2 = $1,025

Note that Spot trading uses the index price rather than a mark price. Both legs are now locked in at quantities of, say, 3 contracts each.

Real-World Profit Scenarios: Buy vs. Sell Spread Trades

Scenario 1: Buying a Spread Trade

When you buy a combo, you profit if the spread between the far and near legs increases. Consider this example:

If you later exit with the Expiry at 90 and Perpetual at 89:

• Expiry Leg: (90 − 85) × 3 = +15 profit
• Perpetual Leg: (88 − 89) × 3 = −3 loss
• Net P&L: +12

Alternatively, exiting at Expiry 83 and Perpetual 90:

• Expiry Leg: (83 − 85) × 3 = −6
• Perpetual Leg: (88 − 90) × 3 = −6
• Net P&L: −12

Scenario 2: Selling a Spread Trade

When you sell a combo, you profit as the spread narrows. Using similar instruments:

Exiting at Expiry 94 and Perpetual 83:

• Expiry Leg: (92 − 94) × 3 = −6
• Perpetual Leg: (83 − 81) × 3 = +6
• Net P&L: 0

These scenarios illustrate how spread trading isolates spread movements from directional market risk—your returns depend entirely on how the relationship between the two legs evolves.

Execution Options & Position Management

Spread trading supports multiple order types and strategies. You can place Limit orders (specifying exact prices) or Market orders (executing immediately at current spread rates). Order strategies include Post-Only (never taking liquidity), Good-Till-Canceled (GTC, remaining active until manual cancellation), Immediate-Or-Cancel (IOC, filling any available quantity instantly), and Fill-Or-Kill (FOK, executing fully or not at all).

The platform operates in One-Way position mode, and you can choose between Cross Margin (using your full account balance as collateral) or Portfolio Margin (optimized risk calculation across positions). Leverage is adjustable per leg—up to 10x for Spot and 100x for Futures contracts.

Once a spread trade executes, both legs function as standard positions in their respective markets. You can manage or close them either on the dedicated spread trading interface or directly within each instrument’s market page. The positions follow standard margin requirements and liquidation rules, providing familiar risk management within a streamlined execution framework.

The Economics of Efficiency

The 50% fee reduction compared to placing separate orders reflects the operational efficiency of spread trading. Instead of two transactions, you’re executing a single atomic order, reducing overhead and market impact. VIP traders benefit additionally, with the 50% discount applied atop their existing VIP fee tier—transforming what could be expensive dual-order execution into a cost-effective arbitrage vehicle.

Spread trading combines the precision of atomic execution, the cost-efficiency of consolidated orders, and the flexibility of delta-neutral strategies into a single, powerful trading tool. Whether you’re arbitraging funding rates, capturing calendar spreads, or executing sophisticated hedges, this approach provides the certainty and efficiency that modern traders demand.