Futures Basis

The futures basis is the difference between the current spot price of an asset and the price of its corresponding futures contract. In a healthy market, the futures price typically trades at a premium to the spot price, a condition known as contango, reflecting the cost of carry.

If the futures price is lower than the spot price, the market is in backwardation, which often signals immediate supply constraints or extreme bearishness. Traders use the basis to execute arbitrage strategies, such as cash-and-carry, where they buy the spot asset and sell the futures contract to lock in a risk-free profit.

The basis is a critical indicator of market efficiency and the cost of leverage. Fluctuations in the basis provide insight into supply and demand imbalances.