Explain How a Credit Spread Can Create a Negative Cost of Carry.
A credit spread is an options strategy where the premium received from selling an option is greater than the premium paid for buying a different option (same underlying, same expiration, different strikes). The net premium received is a credit to the account.
This credit generates a positive cash flow upfront, which effectively results in a negative cost of carry for the duration of the spread, reducing the overall cost of the hedged portfolio.
Glossar
Negative Cost
Context ⎊ Negative Cost in financial engineering, particularly within crypto derivatives, describes a scenario where holding an asset or entering a specific derivative position results in a net cash inflow rather than an outflow, often seen in deeply backwardated futures markets or specific arbitrage structures.
Negative Cost of Carry
Arbitrage ⎊ Negative cost of carry emerges within cryptocurrency derivatives markets, particularly concerning perpetual swaps and futures, where funding rates can invert, creating a scenario where short positions accrue a yield.
Credit Spread
Derivation ⎊ The credit spread, within cryptocurrency derivatives, represents the difference in yield or implied volatility between a crypto-asset-linked instrument and a benchmark, typically a stablecoin or a risk-free rate proxy.
Net Premium Received
Valuation ⎊ Net Premium Received represents the aggregate premium inflows accepted by an options writer or seller, less any adjustments for fees, commissions, or exercised options, forming a crucial component of derivative revenue.