Basis
A basis is a difference between a spot price (cash price) of the asset and its futures price. It can be either a positive number or negative, and, usually, is calculated by subtracting the current futures price from a spot price.
For example, if the futures price is at $110 and the spot is at $100, the basis would equal a negative $10:
Basis = Spot price – Futures price;
$100 – $110 = -$10
Note, that sometimes the calculations are done in reverse, and the spot price is subtracted from the futures price so that if we have futures above the spot, we will get positive basis.
The absolute value of the basis approaches zero as the futures price converges towards the spot price with less and less uncertainty about where the contract will be settled. Before that, the basis may fluctuate quite a bit, and traders need to be aware of that.
