Spot Price vs Futures Price
Why the futures price differs from today’s price, and what the gap tells you.
The “spot” price is the price of the underlying right now; the futures price is what the market agrees to trade it at at expiry. These two are usually not equal — and the gapA jump between one bar’s close and the next bar’s open. (the “basis”) isn’t random; it follows a logic called cost of carry.
The futures price is essentially the spot price plus the cost of carrying the asset until expiry. Why? Think of an arbitrageur: instead of buying a futureA binding agreement to buy or sell at a set price on a future date., they could borrow money, buy the asset today, and hold it to expiry — paying interest (the carrying cost) but earning any *dividendsA cash payout of company profits to shareholders.. For both routes to cost the same (no free lunch), the futures price must roughly equal *spot + interest − dividendsA cash payout of company profits to shareholders.*. That’s why futures usually trade slightly above* spot, and why the gapA jump between one bar’s close and the next bar’s open. shrinks to zero as expiry nears (less time left to carry). The basis isn’t a mystery — it’s the math of carrying the asset through time, policed by arbitrage.
- Cost of carry — futures ≈ spot + financing cost − dividendsA cash payout of company profits to shareholders. over the time to expiry.
- Convergence — as expiry approaches, the carry cost shrinks, so the futures price converges to spot; at expiry they’re equal.
- Basis — the spot-to-futures gapA jump between one bar’s close and the next bar’s open.; watched by traders as a gauge of demand, financing rates and sentiment.
ExampleThe NiftyA basket of stocks tracked together to represent a market. spot is 22,000 and short-term interest implies ~₹100 of carry to expiry, with negligible dividendsA cash payout of company profits to shareholders. — so the futureA binding agreement to buy or sell at a set price on a future date. trades near 22,100. As expiry nears, that ₹100 premium melts away and the futureA binding agreement to buy or sell at a set price on a future date. drifts toward 22,000, meeting spot exactly at expiry.
Key takeawayFutures price ≈ spot + cost of carry (financing − dividendsA cash payout of company profits to shareholders.), so futures usually trade slightly above spot. The gapA jump between one bar’s close and the next bar’s open. (basis) shrinks as expiry nears and converges to zero at expiry. Arbitrage enforces this relationship — it’s carry math, not randomness.
FAQs
If futures usually trade above spot, is that a bullish signal?
Not by itself — a modest premium is just normal cost of carry, not a directional view. What’s informative is an *unusual* basis: a much larger-than-normal premium (strong demand/bullishness) or the future trading *below* spot (backwardation — often bearish or high-dividend driven). The next lesson covers those signals.