What Is Futures Basis? A Beginner's Guide to Spot vs Futures
Learn what futures basis means, how it is calculated, why futures can trade above or below spot, and how traders interpret the relationship between cash and futures prices.
What Is Futures Basis?
Futures Basis is the difference between the futures price and the spot price of the underlying.
A simple formula is:
Basis = Futures Price − Spot Price
In other words, basis tells you how far the futures contract is trading above or below the cash-market price.
For the foundation, see What Are Futures? A Beginner's Guide to Futures Trading.
A Simple Example
Suppose:
Then:
Basis = 25,080 − 25,000 = +80 points
The futures contract is trading at an 80-point premium to spot.
If futures were 24,950:
Basis = 24,950 − 25,000 = −50 points
The futures would be trading at a discount to spot.
Positive and Negative Basis
Positive Basis
A positive basis means futures are above spot.
This is sometimes called a futures premium.
Negative Basis
A negative basis means futures are below spot.
This is sometimes called a futures discount.
The interpretation depends on the underlying, time to expiry, financing costs, dividends and market conditions.
Why Does Basis Exist?
Futures and spot prices can differ because of factors such as:
The futures price is therefore not expected to be identical to the spot price throughout the contract's life.
Basis and Cost of Carry
A simplified theoretical framework is:
Futures Price ≈ Spot Price + Cost of Carry − Benefits of Holding the Underlying
For equity index futures, expected dividends are particularly relevant because an investor holding the underlying basket can receive dividends while a futures position does not provide those dividends in the same direct manner.
The actual pricing relationship can be affected by market conditions and contract specifications.
Basis and Time to Expiry
The time remaining to expiry matters.
A futures contract with more time remaining can have a larger difference from spot because there is more time for financing, dividends and other carrying factors to influence pricing.
As expiry approaches, the difference generally tends to narrow.
For expiry fundamentals, see What Is Option Expiry? A Beginner's Guide.
Basis Convergence
One important concept is convergence.
As a futures contract approaches its expiry, the futures price and spot price generally move toward each other under normal market mechanics.
This means the basis tends toward zero at expiry, subject to the applicable settlement methodology and market conditions.
Futures Basis vs Futures Price
These are different concepts.
Futures Price is the quoted price of the futures contract.
Basis is the difference between that futures price and spot.
For example:
The futures price is 25,080.
The basis is +80 points.
Basis and Market Interpretation
Traders sometimes monitor changes in basis as part of a broader market framework.
For example, a widening or narrowing basis can reflect changes in futures pricing relative to spot.
But basis alone does not establish market direction.
It should be considered alongside:
For Open Interest context, see What Is Open Interest? A Beginner's Guide to OI in Options Trading.
Basis and NIFTY Futures
NIFTY futures can trade at a premium or discount to the NIFTY spot index.
The size and direction of the basis can change through the contract's life.
Traders should use current exchange contract specifications and market data when analysing actual contracts.
Basis and Hedging
Basis is particularly important for traders and investors who hedge one instrument with another.
If the hedging instrument and the underlying exposure do not move perfectly together, the difference between them can create basis risk.
A hedge can therefore reduce one type of market exposure without eliminating every source of risk.
How Beginners Can Analyse Futures Basis
For a broader derivatives foundation, see What Are Options? A Beginner's Guide.
Common Mistakes
Assuming Positive Basis Means Bullish
A futures premium can exist for structural pricing reasons.
Assuming Negative Basis Means Bearish
A discount can arise from several factors.
Ignoring Time to Expiry
Basis is strongly connected to the remaining life of the contract.
Ignoring Dividends and Carry
These can influence theoretical futures pricing.
Confusing Basis With Profit
Basis describes a price difference; it is not automatically a trading profit.
Final Thoughts
Futures Basis is a simple but important concept:
Basis = Futures Price − Spot Price
Understanding this relationship helps traders see why futures and cash prices can differ and why that difference generally changes as expiry approaches.
Use basis alongside spot price, futures positioning, Open Interest, volume, carry factors and risk management.
Frequently Asked Questions
What is futures basis?
It is the difference between the futures price and the spot price.
What does a positive basis mean?
It means the futures price is above the spot price.
Does positive basis mean the market will rise?
No. Basis can be influenced by carry, dividends, time to expiry and supply and demand.
What happens to basis near expiry?
The futures and spot prices generally converge, so the basis tends toward zero under normal settlement mechanics.
Disclaimer
This article is for educational purposes only and does not constitute financial advice. Futures trading involves substantial risk. Please consult a SEBI registered investment advisor before making investment decisions. All investments carry risk.
This article is for educational purposes only and does not constitute financial advice. Please consult a SEBI registered investment advisor before making any investment decisions.