The basis in futures trading is the difference between the futures price and the spot price of the underlying asset. It is calculated as: Basis = Futures Price - Spot Price. The basis reflects the cost of carry, which includes storage costs, financing costs, insurance, and any convenience yield associated with holding the physical commodity versus a futures contract.

When the futures price is higher than the spot price (positive basis), the market is said to be in contango. This is the normal condition for most commodities and reflects the costs of storing and financing the physical asset. When the futures price is lower than the spot price (negative basis), the market is in backwardation, which can occur during supply shortages or when there is strong immediate demand for the physical commodity.

The annualized basis expresses the basis as an annualized percentage rate, allowing you to compare the cost of carry across contracts with different expiration dates. As expiration approaches, the basis converges toward zero because the futures price and spot price must be equal at delivery. Traders use basis analysis for cash-and-carry arbitrage strategies, hedging decisions, and to gauge supply and demand dynamics in commodity markets.