Basis Premia in Futures Trading
In the context of futures trading,
basis refers to the differential between the price of an asset in the spot market and the price of its corresponding futures contract
12. When the futures contract is trading at a premium to the underlying spot price, this differential is often referred to as a basis premia
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Understanding the Basis
The basis is calculated as the difference between the futures price and the spot price
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$$\text{Basis} = \text{Futures Price} - \text{Spot Price}$$
These prices often differ because they account for various factors, such as storage costs, interest rates, and expectations about future supply and demand
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Convergence at Expiration
A key characteristic of the basis is that it tends to approach zero as the futures contract nears its expiration date
1. At expiration, the futures contract requires the trader to purchase the underlying asset at the contract's predetermined price, which guarantees that the futures price will converge with the spot price
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Example Calculation
For instance, if the spot price for ETH/USD is $1,719.80 and the price for a December 30 expiry futures contract is $1,723.50, the basis would be calculated as:
$$$1,723.50 - $1,719.80 = $3.70$$
This basis can also be expressed as a percentage, which in this example is 0.215%
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Basis Trading
Basis trading is a strategy where a trader simultaneously buys (or sells) an asset in the spot market and takes the opposite position by selling (or buying) the futures contract for that asset
1. Traders attempt to profit by predicting how the basis will change over time
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Strategy and Arbitrage
If a futures contract is trading at a premium (a positive basis), a trader can execute a "cash-and-carry" strategy by shorting the future against the underlying spot asset
13. As the future converges to the spot price at expiration, the trader collects this difference in basis
1. This strategy is a preferred method among institutional crypto traders for arbitrage, allowing them to exploit price differentials and hedge exposure
34.
Basis in Cryptocurrency Markets
Basis trading is significant in cryptocurrency markets, relying on the gap between the spot price of a crypto asset and the price of its futures contracts
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- Market Trends: The annualized basis for Bitcoin (BTC) and Ethereum (ETH) exceeded 20% at the start of 2024 and experienced a significant increase by mid-February 3. This resurgence led to a substantial surge in the trading volume of futures spreads 3.
- Impact of ETFs: Crypto basis trading gained popularity following the launch of spot Bitcoin ETFs in early 2024, as traders began exploring price differences between spot ETFs and major futures markets like the CME Bitcoin Futures 2.
The dynamics of basis movement and market structure provide valuable insights into market trends and offer attractive trading opportunities
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