What Is a Cash and Carry Trade?

A cash and carry trade is a strategy that allows traders to use market discrepancies. It typically consists of opening at least two positions: a combination of a long, short, futures, or options contract. The strategy requires you to open positions in markets with varying volatility and liquidity, leading to different results from the same instrument.

How a Cash and Carry Trade Works

The cash and carry trade strategy consists of the following steps:

1. The trader identifies a price discrepancy of the same instrument in two markets (e.g., the price difference in EUR/USD options and the spot market).
2. The trader opens one position in each market (e.g., a long position in the spot market and a short-sell futures contract).
3. The trader waits for the future contract to expire, then closes their spot position. Whether the price of the instrument went up or down, the trader will earn a potential profit as long as the positions were properly calculated.

Cash and Carry Trade Example

Let's take a look at another more detailed example of a cash and carry trade.

A trader might identify a discrepancy in the MSFT stock, where it trades at $250 for a CFD position and at $240 for a futures position. The trader opens a long CFD position (anticipating that the price will go up) while opening a short future contract (anticipating that the price will go down).

Since there are two prices for the same instrument, the trader can earn a potential profit whether the price of the MSFT share goes up or down. Doing this without a significant price discrepancy is also possible, but the profit margin is significantly lower.

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