Long the Basis and Short the Basis
Chapters in this video
- 0:00 Why the long basis label is deliberately counterintuitive
- 1:15 Cash minus futures: the basis calculation
- 1:47 Strengthening and weakening on a number line
- 2:16 Exam trap: negative numbers that actually strengthen
- 3:11 Fiona the farmer: long the basis means short futures
- 4:42 Hank the hedger: short the basis means long futures
- 6:00 Master mapping: hedger type, futures leg, basis label, desired move
- 6:57 Pop quiz: negative 35 cents to negative 40 cents
- 7:46 Rapid-fire exam recap
What this video covers
- Why "long the basis" means short futures, and why the basis label always opposes the futures leg
- How the basis is calculated: cash (spot) price minus futures price, and what positive versus negative basis means
- What strengthening and weakening actually describe: the direction of change, not the sign of the basis number
- Why a move from negative 35 cents to negative 30 cents is strengthening, not weakening
- Which hedger (short hedger or long hedger) benefits from a strengthening basis and which benefits from a weakening basis
- How "own the cash, you are long the basis" serves as the master memory aid for the entire topic
- The exam trap of pairing a long hedger with a strengthening basis, and why that pairing is backwards
Read the full lesson, free
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