What is basis and spread?

Hello John,

Thanks for coming here.

Basis is the variation between an asset’s spot and futures contract prices. As such, basis trading entails buying a security and unloading a futures contract with a matching underlying security. According to the trader, both securities are mispriced and a profit depends on the contract’s expiration or market correction in the short term.
Conversely, a spread shows the price difference between two matching securities. It features two legs presented concurrently as a unit. As opposed to profiting from the direct change of leg values, the spectator relies on the shrinking or broadening of the spread. 
Spreads fall into two categories. For intra-market spreads, the assets share a market but vary in their maturity dates. On the contrary, inter-market spreads are characterized by separate assets that are highly related. An example is selling a soybean oil contract in July and buying soybean meal futures the same month.