What Is the ‘Basis’ in a Futures Contract and How Do Traders Use It for Arbitrage?

The 'basis' is the difference between the spot price of an asset and its futures price (Basis = Spot Price – Futures Price). In a normal market, the basis is negative because the futures price is higher than the spot price due to costs like storage and interest.

Arbitrageurs, in a strategy known as a 'basis trade', exploit deviations from this normal relationship. If the basis is too large or small, they can simultaneously buy the cheaper asset (spot or futures) and sell the more expensive one, locking in a profit as the basis converges to its expected value at expiration.