What does Short the Basis mean?
Shorting the Basis means purchase of a futures position in order to hedge against a future commitment to deliver the underlying commodity. An investor takes a ‘long’ position in a futures contract and takes a ‘short’ position in the commodity.
Futures Knowledge Explains Short the Basis
The benefit of this strategy is that it locks in the price, so an increase in the commodities price will not affect the trader. For example, a manufacturer uses cotton as raw material. The cash price for cotton is $5.50 and the September futures price is $4.20. The manufacturer anticipates that he will need 200 quantity of cotton. To protect himself from price rise, he buys cotton futures contract at $4.20.