Spread Convergence Risks

Spread convergence risks arise when the expected narrowing of a price gap between two assets or instruments fails to materialize. In basis trading, this happens if the perpetual price does not revert to the spot price as anticipated, or if the basis widens instead of narrowing.

This can lead to losses if the trader is forced to close their position at an unfavorable price. These risks are often linked to sudden shifts in market sentiment, liquidity crunches, or changes in the funding rate dynamics.

Successful basis traders must account for these risks by setting wide stop losses or using hedging strategies to protect against unexpected divergence in price spreads.