Basis Spread

What is a Basis Trade?

A basis trade involves simultaneously buying (or selling) an asset in the spot market while selling (or buying) its corresponding futures contract. Since spot and futures markets operate independently, their prices are not always identical. The difference between these prices is referred to as the "basis."

As a futures contract approaches its expiration date, its price typically converges toward the underlying spot price. This happens because, at expiry, futures contracts require the long position holder to purchase the underlying asset at the predetermined contract price, ensuring alignment with the spot market. Consequently, as expiration nears, the basis should gradually approach zero.

If a futures contract trades at a premium to the spot price, a trader can short the futures contract while holding the underlying asset. As the futures price converges to the spot price at expiry, the trader captures the basis difference as profit. Fixed-expiry futures offer a predictable return on basis trades due to their structured settlement.

Example

As of January 2025, the BTC/USD spot price was $103,337, while the BTC futures contract expiring on March 28th traded at $105,101. The basis, calculated as the difference between the futures price and the spot price, is:

$105,101 - $103,337 = $1764.