How Can a Trader Use the Funding Rate to Execute a ‘Funding Rate Arbitrage’ Strategy?

A trader executes funding rate arbitrage by simultaneously taking a long position in the spot market and a short position in the perpetual swap market (or vice versa). The goal is to collect the funding rate payments.

For example, in a strong contango (positive funding), the trader is short the swap and long the spot, receiving the funding payments from the longs while being market-neutral. The profit is the accumulated funding payments minus trading fees.