A large basis indicates that futures are in a positive market, but whether to be long or short depends on the actual market.
If the supply in the forward market is insufficient and the demand is relatively strong, the contract price will increase more than the forward monthly contract, or the contract price will decrease less than the forward monthly contract. You can do more in the near contract, short in the far contract, and establish the same warehouse arbitrage operation.
Firm arbitrage When the absolute value of the spread is greater than the cost of the position, the opportunity of firm arbitrage appears in the positive market. At this point, you can make long contracts in recent months and establish short contracts with the same position in distant months. Receipt of warehouse receipts in recent months, and delivery and liquidation of warehouse receipts in distant months, can obtain risk-free income.
Positive bear market arbitrage If there is oversupply in the market and the demand is relatively insufficient, the contract price in recent months will drop more than the forward, or the contract price in recent months will increase less than the forward. Or, at this time, you can arbitrage, short the contract in the near month, and establish a long contract with the same position in the far month.
First of all, we must understand what the basis is: basis = spot price-futures price. The futures price deviates greatly from the spot price when it enters the market, and the basis regression trading strategy is based on this.
How to grasp the futures market through basis difference;
First, the emergence of high basis difference and the inevitability of its return.
In the basis regression trading strategy, the first requirement is that there is a high basis in the recent contract, so why is there a high basis in the futures contract? We know that the spot price is the current circulation price of commodities, while the futures price is the expected price of commodities by market participants at a certain point in the future, so the price difference is natural. Due to the influence of various fundamental factors, especially some sudden factors, such as sudden disasters in the growth period of agricultural products, the market makes loose or tight expectations on the supply and demand of commodities at a certain point in the future, which is reflected in the discount of futures prices on spot prices and the speculative pursuit of funds, which is the fundamental reason for the high basis difference. If the fundamentals are calm, the basis will remain at a reasonable level.
Without considering the forced position, as the delivery month approaches, the high basis will inevitably return. Why? This is because excessive basis will produce risk-free spot arbitrage opportunities. Imagine that you are a rebar trader. If the spot price of rebar is 3500 and the futures price is 4000, what will you do? Yes, you will buy rebar in the spot market and sell rebar in the futures market, and vice versa. This is spot arbitrage. This arbitrage process will make the spot price of rebar rise and the futures price fall until the price difference between them returns to a reasonable level, and there is no arbitrage space. This is the inevitability of basis regression and the theoretical basis of this trading strategy.
Therefore, in the basis regression trading strategy, the first indicator we should pay attention to is the high basis of contracts in recent months. How to know which varieties have high basis difference? How high is the foundation? This can be queried at will in the arbitrage baby membership system.
Second, the direction of basis regression
A high foundation is bound to pay off, but there may be two ways to pay off. The futures price approaches the spot price or the spot price approaches the futures price. For investors without spot background, only the former can be traded. When various recent contracts show high basis, we need to judge the direction in which the basis may return.