◎ Level 3 · Intermediate Derivatives & Leverage Dated Futures

Futures Basis

Learn crypto futures basis, contango, backwardation, annualised basis, convergence and why headline basis is not guaranteed carry.

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DERIVATIVES & LEVERAGE · DATED FUTURES

Futures basis is the difference between a dated futures price and its underlying spot or index reference. Positive basis means the future trades above spot; negative basis means it trades below. Basis captures financing, positioning, borrow constraints and risk premia across the remaining time to expiry.

Risk first. Basis is not a guaranteed yield. A convergence trade can still lose through execution costs, borrow changes, margin calls, liquidation, venue failure, settlement mismatch or basis widening before maturity.

Learning objective: understand the mechanics, risk controls and analytical distinctions needed to interpret this derivative concept without treating leverage or carry as a recommendation.Last reviewed: 21 August 2026

Core concept
Mechanics
Compare
Worked example
Risk map
Mistakes
Workflow
Checkpoint
FAQ
Summary

Core concept

Absolute basis is simply futures price minus spot/reference price. Percentage basis scales that difference by the spot price. Traders often annualise basis to compare maturities, but simple annualisation assumes the current relationship persists linearly to expiry.

Because a dated future converges into its final settlement reference, basis tends toward zero at maturity if the contract and reference function normally. Before expiry, however, basis can widen or change sign.

Cash-and-carry trades attempt to isolate basis by holding spot and shorting futures, while reverse cash-and-carry does the opposite where borrow and operational conditions allow. Neither structure is risk-free.

Contract-specification rule: Crypto derivatives are not fully standardised across venues. Always treat the exchange's contract specification, index methodology, margin schedule and settlement rules as authoritative for that product.

How the mechanics fit together

Absolute basis

Futures price − spot/reference price.

Percentage basis

Absolute basis ÷ spot/reference price.

Simple annualised basis

Percentage basis × 365 ÷ days to expiry; a comparison convention, not a forecast.

Contango

Positive basis.

Backwardation

Negative basis.

Convergence

Basis moving toward final settlement as time expires.

Analytical discipline: Keep market exposure, collateral, carry, settlement and venue risk as separate lines. Combining them into a single “leverage” number hides the mechanism that can actually cause a loss.

Comparison framework

Input	Example	Interpretation	Caution
Spot	£80,000	Current reference	May differ by venue/index
90-day future	£82,000	+£2,000 basis	+2.5% over spot
Simple annualised	~10.14%	2.5% × 365/90	Not guaranteed realised return

Worked example

With spot at £80,000 and a 90-day future at £82,000, absolute basis is £2,000 and percentage basis is 2.5%. A simple annualised comparison is about 10.14% (2.5% × 365/90). But a trader trying to capture that spread must still account for spot trading costs, futures fees, custody, financing or borrow, margin buffers, taxes/accounting treatment, and the possibility of liquidation or venue failure before settlement.

Why the example matters: Translate derivative labels into money notional, cash-flow timing and failure modes. A concept is not understood until you can explain what changes the account balance and what can force the position to close.

Risk map

Mark-to-market risk

Basis can widen before converging, creating large interim losses on one leg.

Borrow/funding risk

Financing or asset borrow can become expensive or unavailable.

Execution mismatch

Spot and futures legs may fill at different prices/times.

Counterparty risk

A theoretically locked spread can fail if one venue cannot honour withdrawals or settlement.

Leverage caution. Leverage does not improve expected price direction. It changes how quickly market moves, fees and carry affect account equity and therefore the probability of forced risk reduction.

Common mistakes and misunderstandings

Calling annualised basis a guaranteed APY.
Ignoring days-to-expiry when comparing futures.
Assuming spot and futures references are perfectly matched.
Using insufficient margin because the trade is 'hedged'.
Ignoring the operational risk of moving collateral between venues.

Practical analysis workflow

Choose a consistent spot/index reference.
Calculate absolute and percentage basis.
Normalise by time to expiry only for comparison.
Deduct realistic execution, financing, custody and operational costs.
Stress-test basis widening and venue failure before describing a trade as hedged.

Operational rule: If you cannot identify the notional, risk reference, margin requirement, settlement asset and exit/expiry mechanics, you do not yet have enough information to quantify the position.

Knowledge checkpoint

These questions are specific to Futures Basis.

Q1. What are absolute and percentage basis for £82,000 futures versus £80,000 spot?

Q2. Why is ~10.14% simple annualised basis not a guaranteed 10.14% return?

Q3. How can a hedged cash-and-carry trade face liquidation?

Q4. Why must the futures settlement index be compared with the spot asset actually held?

Self-check: A strong answer should identify the relevant price/reference, cash flow and risk pathway rather than merely labelling the setup bullish, bearish or high yield.

FAQ

❓ Does positive basis mean bullish sentiment?

It can reflect positioning, but financing and structural demand also matter; basis alone is not a directional signal.

❓ Does basis always converge to zero?

A functioning dated future converges into its settlement reference at maturity, but execution and reference mismatches still matter.

❓ What is annualised basis?

A time-normalised comparison of current basis, not a promised yield.

❓ Can basis trades lose money?

Yes, through costs, margin/liquidation, borrow, execution, settlement and counterparty risks.

Summary

Basis is the difference between futures and spot/reference price.
Time to expiry is essential when comparing basis across contracts.
Annualised basis is a comparison convention, not guaranteed carry.
Hedged basis strategies still contain material market-structure and operational risk.

This building block is educational. It explains market structure and risk; it is not a recommendation to use derivatives or leverage.

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