What is basis in futures trading? Spot vs futures, annualised
Basis is the difference between a futures contract’s price and the spot price of the same asset. It is usually quoted as futures minus spot, so a future trading above spot has a positive basis — and for a dated contract that gap shrinks to zero by expiry.
This page covers how to compute basis, how to annualise it so contracts with different expiries can be compared, what “basis” means on a perpetual that never expires, and the thing that catches hedgers: a hedged position is not flat, it is exposed to changes in the basis. For the broader choice between the two contract types, see perpetuals vs dated futures.
Why this matters now
Basis is quoted everywhere futures trade, often as an annualised percentage, and it is read three ways: as the cost of holding a futures position instead of spot, as the spread a cash-and-carry position is built on, and as a gauge of how crowded one side of the market is. Each of those readings needs the number computed the same way, and it frequently is not.
Check the sign convention first. Crypto and most financial futures quote futures minus spot. Many physical commodity markets quote spot minus futures. The same market can therefore show +1,500 in one data source and −1,500 in another.
How it actually works
Illustrative numbers: spot at 60,000, a dated future expiring in 90 days at 61,500.
- Raw basis.
futures − spot = 61,500 − 60,000 = 1,500. - As a percentage of spot.
1,500 ÷ 60,000 = 2.5%. - Annualised, simple.
2.5% × 365 ÷ 90 = 10.14%a year. - Annualised, compounded.
(61,500 ÷ 60,000)^(365 ÷ 90) − 1 = 10.53%.
Annualising matters because a raw percentage is meaningless without the time left. The same 2.5% with 30 days to expiry annualises to about 30.4% simple — three times the rate on the 90-day contract. Whichever method you use, use the same one for every contract you compare.
Contango and backwardation. A future above spot is in contango (positive basis, in the futures-minus-spot convention); a future below spot is in backwardation. Contango is common when holding the asset has a financing cost that the future lets you avoid; backwardation tends to appear when demand for the asset now outweighs demand for it later.
Convergence. A dated future settles against spot at expiry, so the basis must reach zero then. Arbitrage enforces the path: if the future stays too far above spot, buying spot and selling the future captures the gap at settlement. The basis does not shrink smoothly, though — it can widen before it converges.
Basis on a perpetual
A perpetual has no expiry, so there is no date by which its basis must reach zero. Its gap to spot is usually expressed as a premium over an index price — say a perpetual at 60,120 against an index of 60,000, a 0.2% premium.
Instead of convergence by contract, the perpetual uses funding: when it trades above the index, longs pay shorts, which pushes the premium back toward zero. So the two instruments carry the same idea in different forms:
| Dated future | Perpetual | |
|---|---|---|
| Gap to spot | Basis, set at entry | Premium over index, floating |
| Pulled to zero by | Settlement at expiry | Funding payments |
| Holding cost | Known at entry | Accrues at a rate you do not know in advance |
| Annualised figure | Basis × 365 ÷ days to expiry | Funding rate × settlements per year |
The funding side of that comparison is worked through in annualised funding cost, which sets the two carries side by side, and the funding rate calculator.
Basis vs basis risk
This is the distinction people actually confuse.
Basis is a level. Basis risk is the change in that level while you hold a position across both legs.
Take someone who holds 1 unit of spot and shorts 1 unit of the 90-day future to hedge it, at the prices above. Their combined result is not zero; it is minus the change in basis:
hedged P&L = spot change − futures change = −(change in basis)If the basis widens from 1,500 to 2,500 before they close, the hedge shows a 1,000 loss, even though the hedge “worked” in the sense that spot and futures moved together. Held to expiry the basis ends at zero, and the change is fixed by the entry basis. Closed early, it is whatever the basis happens to be that day.
A hedge removes exposure to price and replaces it with exposure to basis. For most hedgers that is a good trade. It is not the same as having no exposure.
The cash-and-carry position, and why it is not free
Buying spot and selling a future above it looks like capturing the basis: enter at a 1,500 gap, hold to expiry, and the gap closes. The arithmetic of that gross spread is correct. The ways it goes wrong are operational:
- The legs sit in different places. Suppose price rises 20% before expiry and the basis stays at 2.5% of spot: spot is 72,000 and the future 73,800. The spot leg is up 12,000; the short future is down 12,300. The future’s loss is taken against its margin, while the spot gain sits in an asset that may not count as margin for it. The short leg can be liquidated while the combined position is roughly flat — at which point you hold unhedged spot.
- The basis can widen before it narrows, which is a mark-to-market loss and a margin demand on the short leg in the meantime.
- Costs on four fills. Entry and exit on both legs, charged on notional, plus the financing cost of the capital tied up in spot. The trading fee calculator covers the fee part.
- Venue and settlement risk. Both legs depend on the venues holding them.
None of this makes the structure wrong. It makes the annualised basis a gross spread before costs and before the risks above, not a return.
Where the boundary should sit
- State the convention and the method. Futures minus spot or the reverse; simple or compounded annualisation. Numbers from two sources are not comparable until both are known.
- Always annualise before comparing expiries, and compare a perpetual’s funding on the same annualised basis.
- Treat a hedge as a basis position. Size margin on the futures leg for an adverse move in price, not for the expected convergence — the liquidation price calculator shows where the short leg alone would be closed.
- Read a wide basis as information, not an instruction. A large premium indicates crowded long positioning; it says nothing about timing, and crowded conditions can persist — see liquidation cascades.
FAQ
What is basis in futures?
Basis is the gap between a futures price and the spot price of the same asset, usually quoted as futures minus spot in crypto and financial markets. A future at 61,500 against spot at 60,000 has a basis of 1,500, or 2.5% of spot. Some commodity markets quote it the other way round, so check the convention before comparing sources.
How do you annualise basis?
Divide the basis by spot to get a percentage, then scale by 365 over the days to expiry. A 2.5% basis with 90 days left is about 10.1% a year simple, or about 10.5% compounded. Annualising is what makes contracts with different expiries, and perpetual funding rates, comparable.
Why does the basis go to zero at expiry?
Because a dated future settles against the spot price, so on the settlement date the two must be equal. Before that, arbitrage between the future and spot keeps the gap within a range, but it can widen or narrow along the way. A perpetual has no expiry and uses funding payments to pull its price toward spot instead.
What is basis risk?
The risk that the gap between spot and futures changes while you hold a position in both. A hedged position’s result is minus the change in basis, so a hedge closed after the basis widens shows a loss even though spot and futures moved in the same direction. Holding to expiry fixes the change; closing early does not.