# Basis and Basis Trading > Basis is the gap between a spot price and a futures price. Learn how hedgers manage basis risk, how basis trades work and the Treasury basis trade. Source: https://learn.tradelabsai.com/futures/basis-and-basis-trading/ Track: Futures · Level: Intermediate · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Basis and Basis Trading", https://learn.tradelabsai.com/futures/basis-and-basis-trading/ Basis is the difference between the spot (cash) price of an asset and the price of a related futures contract. It sounds like a technical detail, but basis is central to how futures are used. Hedgers care about basis because it determines how well their hedge works. Traders care about it because the predictable convergence of basis toward zero at expiry, and its swings along the way, create trading opportunities. ## Definition ``` basis = spot price - futures price ``` Some markets quote it the other way round (futures minus spot), especially in financial and crypto futures, so always check the convention. - **Negative basis** (futures above spot) is typical of contango. - **Positive basis** (futures below spot) is typical of backwardation. See [Spot vs Futures](https://learn.tradelabsai.com/futures/spot-vs-futures/), [Contango](https://learn.tradelabsai.com/futures/contango/) and [Backwardation](https://learn.tradelabsai.com/futures/backwardation/). ## Basis for hedgers A farmer, refiner or fund hedging with futures is exposed to changes in basis, not just in price. If the local cash price and the futures price move by different amounts, the hedge is imperfect. This is basis risk. **Example: A corn farmer's hedge** In May, a farmer expects to harvest 50,000 bushels in October. December corn futures trade at $4.80 and the local elevator usually pays 30 cents under futures (a basis of minus $0.30). The farmer sells 10 December contracts at $4.80, expecting to receive about $4.50 locally. In October, futures have fallen to $4.20, and the local cash price is $3.80, a basis of minus $0.40, weaker than expected. The farmer sells corn for $3.80 and buys back futures at $4.20, gaining $0.60 on the hedge. Net price: $3.80 + $0.60 = $4.40, not the $4.50 hoped for. The 10 cent shortfall is the change in basis. See [Hedging](https://learn.tradelabsai.com/markets/hedging/) and [Corn](https://learn.tradelabsai.com/commodities/corn/). ## What moves basis | Factor | Effect | |---|---| | Local supply and demand | A big local harvest weakens cash prices vs futures | | Transport and storage costs | Distance from delivery points widens basis | | Interest rates | Higher rates widen the financing component | | Quality differences | Grades that differ from the futures standard trade at a discount or premium | | Time to expiry | Basis converges toward zero (adjusted for location and grade) at expiry | ## Basis trading Basis traders take offsetting positions in the cash asset and futures to profit from changes in basis rather than outright price. - **Long the basis:** buy the cash asset and sell futures. Profits if the basis strengthens (cash gains relative to futures). The classic cash and carry trade is a long basis position held to expiry. See [Cash-and-Carry Arbitrage](https://learn.tradelabsai.com/futures/cash-and-carry-arbitrage/). - **Short the basis:** sell (or short) the cash asset and buy futures. Profits if the basis weakens. ## The Treasury basis trade In the US Treasury market, hedge funds buy Treasury bonds and sell Treasury futures, financing the bonds through repurchase agreements (repo). They profit from the small difference between the bond and futures prices, magnified with high leverage. The trade is large; regulators including the Federal Reserve have estimated it in the hundreds of billions of dollars. In March 2020, sharp moves in Treasury and repo markets forced rapid unwinding of basis trades, contributing to market stress that the Federal Reserve addressed with large purchases of Treasuries. See [Treasury Bills, Notes and Bonds](https://learn.tradelabsai.com/bonds-credit/treasury-bills-notes-and-bonds/). ## Crypto basis Crypto futures and perpetual swaps often trade above spot, sometimes by large annualised margins in bull markets. Traders buy spot and short futures to capture this basis, a popular strategy in crypto. See [Crypto Futures and Basis](https://learn.tradelabsai.com/crypto/crypto-futures-and-basis/) and [Funding and Basis Arbitrage](https://learn.tradelabsai.com/crypto/funding-and-basis-arbitrage/). ## Risks of basis trading - **Basis can move against you** before converging. - **Leverage:** small spreads require large positions and borrowing. - **Funding risk:** financing costs (such as repo rates) can jump. - **Delivery and quality details:** for bonds, the cheapest to deliver security can change. - **Counterparty and platform risk,** especially in crypto. ## Frequently asked questions ### What is basis in futures? The difference between the spot price of an asset and the price of a related futures contract. ### What is basis risk? The risk that the spot and futures prices move by different amounts, making a hedge less effective than expected. ### What is the Treasury basis trade? A leveraged trade in which funds buy Treasury bonds and sell Treasury futures, profiting from small price differences, financed in the repo market. Next, learn how futures histories are stitched together in [Continuous Futures and Back-Adjustment](https://learn.tradelabsai.com/futures/continuous-futures/). ## Continue learning - Next lesson: [Continuous Futures and Back-Adjustment](https://learn.tradelabsai.com/futures/continuous-futures/) - Previous lesson: [Roll Yield](https://learn.tradelabsai.com/futures/roll-yield/) - Related: [Roll Yield](https://learn.tradelabsai.com/futures/roll-yield/): Roll yield is the return from futures converging toward spot as they near expiry. Learn how contango and backwardation drive it and how to estimate it. - Related: [Spot vs Futures](https://learn.tradelabsai.com/futures/spot-vs-futures/): Spot is the price for immediate delivery; futures price delivery later. Learn the cost of carry formula, why futures trade above or below spot and convergence. - Related: [Cash-and-Carry Arbitrage](https://learn.tradelabsai.com/futures/cash-and-carry-arbitrage/): Cash and carry arbitrage buys an asset and sells its futures when futures are rich versus carry costs. Learn the formula, gold, index and crypto examples, and risks. - Related: [Hedging](https://learn.tradelabsai.com/markets/hedging/): Hedging means taking a position that offsets the risk of another. Learn how hedges work with options, futures and correlated assets, their costs and limits. - Related: [Funding and Basis Arbitrage](https://learn.tradelabsai.com/crypto/funding-and-basis-arbitrage/): Funding and basis arbitrage buys crypto spot and shorts perps or futures to earn the premium while staying neutral. Learn the mechanics, returns and risks. - Related: [Crypto Futures and Basis](https://learn.tradelabsai.com/crypto/crypto-futures-and-basis/): Dated crypto futures trade at a premium or discount to spot called the basis. Learn CME and exchange futures, how to annualise basis and what it tells traders.