Basis trading
Basis trading is a market-neutral arbitrage strategy that exploits the price difference between a price of an asset and its corresponding future market price. This difference is known as a 'basis' where the trader will profit from price discrepancies. Basis trading is also called the 'cash-and-carry trade'.[1][2][3]
Definition of basis
[edit]In finance, the basis typically refers to the difference between the spot price of an asset and the price of a related futures contract:[4]
- Basis = Spot price − Futures price
The spot price and future prices often differ due to multiple factors including interest rates, and supply and demand.[5]
Types of basis trading
[edit]- Long position: Buying and owning an asset with the expectation that its value will increase in the future.[6]
- Short position: Selling an asset with the expectation that its price will decline and intending to repurchase it later at a lower price.[6]
Advantages and disadvantages
[edit]Advantages to using basis trading include:
- Generating potential steady profit from a volatile market.[4]
- Provides price security for producers, consumers, and traders.[2]
- Protection against price swings.[7]
While the risk that might occur are:
- Complex trading environment for beginners.[5]
- Thinly traded markets can have liquidity risks.[1]
- Leverage misuse without proper risk management.[2]
See also
[edit]References
[edit]- 1 2 "What is Basis Trading?". 4 February 2025. Retrieved 16 June 2026.
- 1 2 3 "What Is Basis Trading, and its Associated Opportunities and Risks?". 3 May 2022. Retrieved 16 June 2026.
- ↑ Schepp, David. "How basis trading works (and why borrowing big makes it risky)". Retrieved 16 June 2026.
- 1 2 "What Is Basis Trading: Definition, How It Works, and Example". 12 May 2025. Retrieved 16 June 2026.
- 1 2 "What Is Basis Trading and How Does It Work?". Retrieved 16 June 2026.
- 1 2 "Basis Trading". 26 November 2019. Retrieved 16 June 2026.
- ↑ "What is Basis Trading?". Retrieved 16 June 2026.
