What Role Does the ‘Basis’ Play in a Futures Arbitrage Strategy?

The 'basis' is the difference between the spot price of an asset and its futures price. Basis = Spot Price – Futures Price.

Arbitrageurs monitor the basis to identify mispricing opportunities. A large negative basis (futures price > spot price) signals a potential cash-and-carry arbitrage.

A large positive basis (spot price > futures price) suggests a reverse cash-and-carry opportunity. The basis must cover transaction costs for the trade to be profitable.