A futures contract almost never trades at the same price as the underlying. New traders usually read that gap as a forecast — the market expecting the price to be higher next month.
It is not a forecast. It is arithmetic, and understanding what it is made of explains several things that otherwise look like anomalies.
What the gap is made of
The difference between the futures price and the spot price is called the basis. Its usual size is explained by what it would cost to hold the underlying yourself until the contract expires.
Consider the alternative to buying a futures contract: buy the shares now and hold them to the same date. That costs you the financing — either interest paid on borrowed money, or the return you gave up by committing your own. It also gives you anything the holding produces in the meantime, principally dividends.
So the fair futures price is roughly the spot price plus financing cost minus expected income. That is the cost of carry. Because financing usually exceeds dividend income, futures typically trade slightly above spot, and the gap narrows as expiry approaches because there is less time left to finance.
At expiry the gap must be zero. The contract settles against the underlying, so the two converge by definition. That convergence is the most dependable thing in this entire subject, and it is why the basis is not a prediction — whatever the gap says, it disappears on a known date.
The practical consequence for anybody rolling positions: the difference you pay between two series is largely this carry rather than a view anybody holds about next month.
Premium, discount, and what a discount indicates
A contract trading above spot is at a premium, which is the ordinary state. A contract trading below spot is at a discount, and that is worth noticing.
A discount can arise for a few reasons, and separating them matters.
A large expected dividend. If the underlying is about to pay out a substantial amount, the futures price reflects a holding that will be worth less after the payment. This is arithmetic rather than sentiment, and it is the first thing to check before reading anything into a discount.
Heavy selling pressure in the derivative. If many participants want short exposure and few want long, the contract can trade below what carry would imply. This is the reading people usually jump to, and it is only meaningful once the dividend explanation has been eliminated.
Difficulty in arbitrage. Normally a large gap is closed by participants who buy the cheaper side and sell the dearer one. Where that is hard — a stock difficult to borrow, a contract with poor liquidity, or capital constraints — a gap can persist longer than theory suggests.
The useful discipline is to check the ordinary explanations before reaching for sentiment. A discount around a dividend date is a payment, not a signal. A discount with no such explanation, persisting across sessions, is at least worth a question.
Turning the basis into a number you can use
The gap is quoted in rupees, which makes it awkward to judge. Converting it into an annualised rate makes it comparable to everything else you pay for money.
Take the futures price minus the spot price, divide by the spot price to express the gap as a percentage, then scale that up to a year using the days remaining until expiry. A contract expiring in thirty days trading half a percent above spot is carrying roughly six percent on an annualised basis.
That single number is useful in three ways.
It tells you what the market is charging to finance the position. Compare it against what money actually costs you. If the implied rate is higher than your own cost of funds, buying and holding the underlying is the cheaper route to the same exposure. If it is lower, the contract is. That comparison is the honest one, and it is not the comparison between margin and full contract value that people usually make.
It makes two series comparable when you roll. The absolute gap between this month and next means little on its own. The annualised rate tells you whether you are paying an ordinary carry or an unusual one, which is the only way to know whether a roll is expensive.
It exposes a quote that does not make sense. An implied rate far from anything plausible usually means something else sits in the price — an expected dividend you have not accounted for, a corporate action, or simply a stale quote on a contract nobody is trading.
Two cautions. The arithmetic assumes you can transact at the quoted prices, which in a thin contract you cannot. And a gap that looks exploitable to a retail participant has almost always been examined already by people with lower costs and faster execution, so the sensible default is that an unusual number is telling you something about the data rather than about the market.
Where this shows up in practice
Four situations where the basis stops being theory.
Rolling a position. Closing the near contract and opening the next one means paying or receiving the difference between them, which is mostly carry. A long position rolled repeatedly pays that gap each time, and none of it appears as a fee anywhere.
Comparing a futures position against owning shares. Buying futures rather than the underlying looks cheaper because less capital is committed. The financing is not absent — it is priced into the contract. What you are actually choosing is whether to pay financing explicitly through your own borrowing or implicitly through the basis, and the comparison should be made on that basis rather than on the margin required.
Around dividends. A futures holder does not receive the dividend; a shareholder does. The contract price already accounts for that, so being surprised when a futures position does not benefit from an announced payout means the mechanics were never understood.
Expiry week. Convergence is guaranteed, so the basis narrows predictably. That predictability attracts arbitrage activity, which is one reason volumes and behaviour near expiry differ from an ordinary session.
None of this is a strategy. It is the reason a set of prices that look inconsistent are in fact consistent, and knowing it prevents a category of mistake rather than generating a category of profit.
An account that shows both
Compare the contract against the underlying before you assume anything. Free to open
Contract specifications, dividend adjustments and settlement conventions are set by the exchanges and revised periodically — confirm current details before acting. This is educational material, not advice, and nothing here recommends any position. We run no tips group and no signal service, we manage nobody's money, and no return is promised. Futures can lose more than the amount blocked against them.
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Frequently Asked Questions
Why does the futures price differ from the spot price?
Because holding the underlying yourself until expiry would cost financing and would earn any dividends. The fair futures price is roughly spot plus financing minus expected income, which is the cost of carry. It is arithmetic rather than a forecast of where the price is going.
What does it mean when futures trade at a discount?
Check for an expected dividend first, since a large payout mechanically pushes the contract below spot. After that, a discount can reflect heavy short interest in the derivative, or conditions that make arbitrage difficult. Sentiment is the last explanation to reach for, not the first.
Do futures converge with spot at expiry?
Yes, by definition, because the contract settles against the underlying. The basis narrows as expiry approaches and is zero at settlement, which is why the gap cannot be read as a prediction about the price.
Do I get dividends if I hold futures?
No. Only a shareholder receives the dividend. The futures price already reflects the expected payout, so the holder is neither gaining nor losing from it — it was priced in when the position was opened.
Is buying futures cheaper than buying shares?
Less capital is committed, which is not the same as cheaper. The financing cost is embedded in the contract price through the basis rather than removed. The honest comparison is between paying financing explicitly and paying it implicitly, not between margin and full value.
Related Reading
- Derivatives taught from the mechanics up
- What you pay when you roll a position
- Obligation against right, compared
- Using futures against a holding
- How dividends adjust contracts
- Why expiry week behaves differently
Disclaimer: TheFinBaba provides educational content only - this is not investment advice. Trading involves risk of loss.
