What Does a Negative Basis (Backwardation) Imply about the Market?
A negative basis, or backwardation, means the futures price is lower than the spot price. This implies that the market expects the spot price of the underlying asset to fall by the time the futures contract expires.
Backwardation often occurs in commodity markets when there is an immediate shortage of the asset, or in financial markets when there are high convenience yields or negative financing costs. It is generally considered a sign of a tight supply in the spot market.
Glossar
Roll Yield
Income ⎊ The profit or loss generated by moving a futures position from an expiring contract to a new one is a critical factor in the total return of a derivative-based portfolio.
Negative Basis
Basis ⎊ The negative basis in cryptocurrency derivatives, particularly options and perpetual futures, signifies a condition where the cost of carry ⎊ typically encompassing financing costs, storage expenses (relevant for physical delivery contracts), and convenience yield ⎊ exceeds the expected future spot price.
Futures Price
Valuation ⎊ Futures price, within cryptocurrency and derivative markets, represents a binding agreement to transact an asset at a predetermined future date and price, functioning as a standardized forward contract facilitated by an exchange.
Spot Price
Valuation ⎊ The spot price in cryptocurrency, options, and derivatives represents the current market-clearing price for immediate delivery of the underlying asset, functioning as a fundamental benchmark for pricing more complex instruments.
Backwardation
Contango ⎊ ⎊ Backwardation, within cryptocurrency derivatives markets, signifies a futures contract price trading below the expected spot price, a deviation from the more common contango structure.