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Basis

The gap between a derivative's price and spot. Positive basis means futures trade above spot, which can be harvested by holding spot and shorting the future.

For a dated future, basis converges to zero at expiry, so an annualised premium is a lending rate in disguise. For a perpetual there is no expiry, and the equivalent is the funding-rate, which pushes the contract back towards spot continuously.

The cash-and-carry trade buys spot and shorts the future to capture that premium, and it is market-neutral in price terms only. It still carries exchange credit risk, margin risk if the short moves against you before convergence, and the risk that basis widens further before it narrows.

Basis is also a sentiment gauge. Wide positive basis and heavily positive funding indicate crowded leveraged longs, a condition that has preceded many liquidation-cascade events. Deeply negative basis indicates the opposite crowding.

Related: funding-rate, funding-interval, contango, arbitrage-bot

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Contango and backwardationTwo futures curves against contract expiry: one rising above spot, one falling below it.The same commodity, priced for delivery at different dates.78.0076.0074.0072.0070.00Futures pricespot+1m+2m+3m+4m+5m+6mMonths until the contract expiresspot price74.00CONTANGOlater contracts cost more than spotBACKWARDATIONlater contracts cost less than spot
Contango and backwardation. A futures curve shows what buyers will pay for delivery in one month, two months and so on. When later contracts cost more than the spot price the curve is in contango; when they cost less it is in backwardation.

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