How to trade the Basis

What is Basis Trading?

Basis trading is a common trading strategy used in both traditional and crypto markets. It is a low risk taking trade where a trader expects there to be a change in the price of a future contract versus its spot counterpart. The strategy can come in two different trade forms, these are called ‘long basis’ or ‘short basis’. If a trader expects this basis difference to grow, the trade they will take would be termed ‘long the basis’, and conversely, a trader enters ‘short the basis’ when they speculate that the difference will decrease.

Speculating using a Basis Trading Strategy

If a trader thinks that there is going to be an increase in the price of a digital asset in the future but wants to take a low risk trade to speculate this theory, they can ‘long the basis’. Practically this means that they would short the spot contract, and long the futures contract. Over time they would expect that the return of the future contract would outpay the negative loss on the spot contract.

On the other hand, if a trader thinks that the price of a digital asset in the future will in fact decrease and come back to parity against its spot counterpart, they can short the basis. In trading terms this means they would long the spot contract and short the future contract in anticipation of the future coming back to parity.

Benefits of Basis Trading

1. Simple concept to speculate the increase or decrease of an asset
2. Being long and short the same asset enables for a almost perfectly hedged trade implying low risk

‍Drawbacks of Basis Trading

1. ‍Basis trades can take significant time to come to maturity
2. You may pay out on the futures leg negatively if funding is the opposite to your trade direction
   

Cross exchange basis trading with Alpha

With the nature of the digital asset space having a plethora of liquidity across many providers such as Binance and FTX etc. There are many opportunities to trade the basis across more than just one exchange. Alpha provides a simple vehicle for traders to view Basis trades across many markets on different exchanges. It may be that you want to trade the Basis promptly for BTCUSDT Spot on Binance and the BTC-PERP future on FTX, with Alpha you are able to do this efficiently.

Conclusion

Basis trading attempts to benefit from changes in the basis of futures contract prices.

The basis is the difference between the spot price of a commodity and a futures contract that expires two or more months later. 

Basis trading participates in a sophisticated game of trying to anticipate changes in the expectations of hedgers and speculators.

Alpha enables you to trade the basis across many exchanges in once centralized area

If you’d like to try Alpha for free, click here to get started.