Basis (Futures-Cash)

Basis is the gap between two prices that are supposed to track the same underlying thing: the current "cash" or "spot" price of an asset, and the price of a futures contract on that same asset. It is usually written as cash price minus futures price, though some markets quote it the other way, so it's worth checking convention before comparing numbers across sources.

The reason a gap exists at all is that a futures contract is a promise to deliver (or settle) the asset at a specific date in the future, and that promise carries extra costs and expectations: storage, insurance, interest on borrowed money to hold the asset, expected supply and demand at delivery time, and so on. For a physical commodity like corn or crude oil, basis reflects local supply, transport costs, and storage costs relative to the futures price traded on an exchange. For a financial future, like one on a stock index, basis mostly reflects the cost of carrying the position (interest rates) minus any dividends expected before expiry.

As the futures contract approaches its expiration date, basis tends to shrink toward zero, because at expiry the futures price and the cash price must converge — the contract is either settled in cash against the spot price or physically delivered, so no persistent gap can survive that moment. This shrinking process is called "basis convergence," and traders who hold positions across both markets (hedgers, arbitrageurs) watch it closely.

The nuance that trips people up: basis is not the same as simple mispricing you can freely arbitrage away. Basis can stay wide or even widen further before it eventually narrows, because carrying costs, delivery logistics, and short-term supply shocks are real and can persist for weeks. A trader who assumes basis "must" close quickly can get badly hurt holding a position that only converges much later than expected.