Basis trading for beginners, how cash-and-carry works, where it breaks, and what to track

Ever looked at a futures price sitting above spot and thought, “So I just buy spot, sell futures, and it’s done?” That instinct is basically basis trading (cash-and-carry), and yes, sometimes it can act like a simple conveyor belt of carry yield. But basis trading is not a coupon you clip without watching the machine. The trade can look “market-neutral” on paper, then break because of funding spikes, margin calls, custody delays, or an exchange that freezes withdrawals at the worst time. This guide explains how cash-and-carry works, where it breaks, and the daily numbers you should track before you size up. Basis trading in plain English (spot vs futures spread) Basis is just the price gap between a futures contract and the spot asset. Basis (absolute):Basis = Futures Price (F) − Spot Price (S) If the futures trades higher than spot (contango), the basis is positive. Cash-and-carry tries to “capture” that basis by holding the asset (cash) and selling the futures (carry). For a basic definition and the traditional framing, Investopedia’s explanation of the cash-and-carry trade is a good reference point. One small reality check though: the basis is not your profit by default. Your profit is basis minus all the friction, including fees, financing, margin costs, and operational risk. How cash-and-carry works step-by-step (the beginner version) Flow diagram showing buy spot, hold/finance, sell futures, and earn carry at convergence, created with AI. A basic cash-and-carry basis trade looks like this: Step 1 (Spot leg): Buy the asset in spot (you hold it, or you custody it).Step 2 (Futures leg): Sell (short) the equivalent futures contract with the same notional.Step 3 (Wait): Hold until expiry (or close earlier), hoping the futures premium compresses.Step 4 (Exit): At expiry, futures converges to spot (in normal markets), and the spread you sold tends to be realized. To compare opportunities across expiries, people often convert basis into a yearly rate. Annualized basis (simple):Annualized Basis % = ((F − S) / S) × (365 / Days to Expiry) × 100 This is “headline carry”. Your bank account does not receive headline carry. Your trade receives net carry after costs. Net carry after fees and financing (what you actually keep) If you buy spot using your own cash, your main carry cost is the opportunity cost of capital (what that cash could earn elsewhere). If you borrow to buy spot, then your explicit financing cost matters a lot. A practical way to think about it: Net Carry % (simple estimate) = Annualized Basis % − Financing % − Fees % − Other Costs % Where “Other Costs” can include custody, transfer fees, hedging roll costs, and slippage. A slightly more explicit version for a single holding period: Net PnL ≈ (F − S) × Q − Spot Fees − Futures Fees − Financing Cost − Slippage(where Q is quantity) If your futures leg is a perpetual swap (common in crypto), the “basis” is not just the price gap, it’s also affected by funding payments. Funding can flip fast, and that’s where beginner expectations often get hurt. Corporate Finance Institute has a short overview of basis trading mechanics and risk that matches this idea: the spread is only part of the story. A numerical example (with fees and margin) Assume a 90-day futures contract, and you want to run 1 BTC notional: Spot price S = $100,000 90-day futures price F = $102,000 Quantity Q = 1 BTC Spot taker fee = 0.10% Futures taker fee (open + close) = 0.04% each side (0.08% total) Financing: you borrow 50% of spot value at 8% APR (simple) Futures initial margin: 10% of notional (you post collateral, it can still get liquidated if moves go against you) First, the headline basis: Basis = 102,000 − 100,000 = $2,000 Basis % = 2,000 / 100,000 = 2.0% over 90 days Annualized basis % ≈ 2.0% × (365 / 90) = 8.11% Now the friction: Spot fee ≈ 0.10% of $100,000 = $100 Futures fees (round trip) ≈ 0.08% of $102,000 (approx notional) = $81.60 (roughly) Financing cost: you borrow $50,000 for 90 days at 8% APR Financing ≈ 50,000 × 0.08 × (90 / 365) = $986.30 Estimated net PnL: Net PnL ≈ 2,000 − 100 − 81.60 − 986.30 = $832.10 Here’s the same math in a quick scan table: Item Simple calculation Result Gross basis (F − S) × Q $2,000.00 Spot fee 0.10% × S -$100.00 Futures fees (round trip) 0.08% × F -$81.60 Financing (borrow 50%) 50,000 × 8% × (90/365) -$986.30 Net PnL (est.) Sum $832.10 One more “margin reality” line: even if the trade is directionally hedged, your futures short can go deeply negative before convergence, which triggers variation margin. If BTC rips higher quickly, you might get a margin call on the short futures while your spot profit is sitting somewhere else (or locked in custody). That timing mismatch is where forced exits happen. Why basis converges (and why it sometimes doesn’t) Chart showing futures starting above spot and converging toward expiry, created with AI. In classic futures pricing, the futures premium reflects “cost of carry” (rates, storage, insurance, convenience yield). As expiry approaches, futures and spot tend to meet because the contract settles (cash or physical delivery), so there’s less time for the carry to exist. Where it gets messy is contract design: Cash-settled futures: you settle in cash, you still need enough collateral to survive mark-to-market swings. Physically delivered futures: you may need to deliver (or accept) the underlying, so custody and transfer rules become part of the trade. Perpetual swaps: no expiry, convergence is “encouraged” by funding, and funding can be the whole PnL driver. For a more systemic risk angle (mostly in Treasuries, but the logic rhymes), the CFTC MRAC paper on the Treasury cash-futures basis trade and risk practices is a sober read on how crowded basis trades can unwind. Where cash-and-carry breaks (the non-fun part) Key failure points like margin calls, funding spikes, haircuts, and liquidity stress, created with AI. Cash-and-carry breaks in very repeatable ways, and beginners often meet them in this order: Margin and liquidation risk: Your futures leg is marked-to-market. A sharp move can liquidate you even when the “hedge” is correct long-run. Liquidity and slippage: The basis you see on a chart is not always tradable size. Thin order books widen spreads, then your basis edge disappears into slippage. Collateral haircuts: Exchanges and brokers may haircut your collateral (or change accepted collateral). A haircut is like the venue saying, “We count your $100 as $80 today,” and that can force de-risking. Funding and borrow jumps: Funding spikes on perps, or borrow rates jump on spot financing. Your net carry goes negative while you’re still stuck in the position. Exchange and custody risk: If you can’t move the asset, you can’t rebalance. Withdrawal pauses, slow chains, or compliance holds can turn a tidy hedge into a one-sided risk. Settlement and expiry mechanics: Expiry is not a magic moment, it’s a rulebook moment. Final settlement price, settlement window, auto-deleveraging, delivery procedures, all of it matters. Tax and reporting drag (high-level, not advice): Spot and futures can be taxed differently by country, and timing can matter (realized vs unrealized rules, derivatives treatment, loss offsets, and so on). In places like India, crypto can face a flat tax regime for VDAs, which changes the after-tax carry you keep. Talk to a tax professional for your case. What to track (daily and weekly monitoring checklist) Use a checklist because memory gets optimistic when PnL is green. Daily (5 minutes) Current basis and annualized basis for your exact expiry Funding rate (if perps), and whether it’s trending or spiking Margin ratio, liquidation price, and free collateral buffer Bid-ask spread and top-of-book depth on both legs Borrow/financing rate, and any venue notices about margin or collateral Weekly (15 minutes) Stress test: “What if spot moves 10% in a day?” (can you meet margin?) Venue risk review: custody status, withdrawal limits, system incidents Expiry calendar: settlement time, index methodology, roll plan Correlated basis crowding: are many traders doing the same trade now? Common beginner mistakes (and how to avoid the pain) Sizing too big: A small basis doesn’t mean small risk, because the path matters. Ignoring where PnL sits: Spot gains don’t pay futures margin calls unless you can move funds quickly. Chasing the highest annualized basis: Big basis often means big stress, low liquidity, or a funding trap. Forgetting fees and slippage: If your expected edge is 1% and your frictions are 0.9%, you’re basically working for variance. Not reading contract specs: Tick size, settlement method, expiry time, and auto-close rules are not “fine print”, they are the trade. Conclusion (and a short risk disclaimer) Basis trading can feel like harvesting a premium, buy spot, sell futures, wait, collect. In real markets, the premium is paid to whoever can manage margin, liquidity, and operational risk without panic exits. Track net carry (not headline basis), keep your position size boring, and treat venue and settlement rules as part of the strategy, not an afterthought. Risk disclaimer: This article is for education only, not investment, tax, or legal advice. Trading spot and futures involves real loss risk, including liquidation and counterparty risk, and you should use risk limits you can live with.