How Does Basis Trading (Arbitrage) Work between the Spot and Futures Markets?

Basis trading, or arbitrage, involves simultaneously taking an opposite position in the spot market and the futures market to profit from the temporary price difference (the basis). For example, if the futures price is significantly higher than the spot price, a trader would buy the spot asset and sell the futures contract.

When the basis converges (ideally to zero at expiration), the trader closes both positions, profiting from the initial price difference with minimal risk.