Differences

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--- 0_public:trading:basis [2024/10/23 21:03] – ↷ Page moved from trading:basis to 0_public:trading:basis pointnm
+++ 0_public:trading:basis [2024/10/23 21:06] (current) – [Current Basis] pointnm
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   * Example: If today is March 1, then use the April Live Cattle futures contract
+===== Differential =====
+<wrap hi>Shorting the differential between the physical and futures price</wrap> involves <wrap hi>betting that the spread (or difference) between the two prices will decrease over time.</wrap>
+Shorting the differential involves <wrap hi>selling the higher-priced asset and buying the lower-priced asset</wrap>, anticipating that the gap between the two prices will narrow over time.
+In a contango market (futures price > physical price):
+You short the futures (sell the futures contract) and buy the physical (buy the commodity now).
+If the futures price decreases or the physical price increases, the differential narrows, and you profit.
+In a backwardation market (futures price < physical price):
+You buy the futures and short the physical (sell the commodity you already hold or borrow to sell).
+If the futures price rises or the physical price falls, the differential narrows, and you profit.
 ===== More =====