Stock Market · Futures Trading

Basis

Futures prices almost always differ from the underlying spot (cash) price. This difference is called the basis. Understanding why it exists and how it behaves at expiry is essential for any futures trader.

Why futures trade above spot (contango)

Futures price = Spot price + Cost of carry

Cost of carry = the interest you would have earned by investing the equivalent capital instead of holding the futures position. In India, this is approximately the risk-free rate (7–8% annually).

Example: Nifty spot = 22,000. 1-month risk-free rate = 0.6%. Nifty futures = 22,000 + 22,000 × 0.6% = 22,132.

> Futures trade at a premium to spot in normal markets. This premium is the 'basis', and it decays to zero by expiry.

Basis at expiry

On expiry, futures must converge to spot. The basis decays over the month and becomes exactly zero at settlement.

Expiry dayFutures price = Spot price (zero basis)

Backwardation (futures below spot)

Occasionally, futures trade below spot. Called backwardation. This happens when:

• Heavy dividend payments are expected before expiry (lowers futures fair value)
• Short sellers are aggressively pushing futures down
• Market expects the underlying to fall

Trading implications

• If you're going long and futures are at significant premium to spot: you're paying extra in basis that will decay. Buy spot shares instead.
• Rollover cost = the basis difference between near and far month. Usually positive (you pay to roll long positions forward).
• Basis widening vs narrowing signals changes in market sentiment and can be a leading indicator.

Takeaway. Futures trade at a premium (basis = cost of carry) above spot in normal markets. Basis decays to zero at expiry. Rollover costs you the basis difference between near and far month.