Long The Basis

An early member of Mott the Hoople, along with Short the Guitar and Sideways the Drummer.

Also, it describes a particular situation in the futures market.

There are two parts to this term: the "long" part and the "basis" part. Let's take the sections separately and then put them back together.

A "long" investment means a bet that the investment will go higher. You buy a stock...that means you're long that stock. It represents the opposite of a "short" position, which looks to profit from a decline in an asset's price.

Okay, onto "basis." The futures market involves contracts to buy or sell some asset at a fixed price at a set date down the road. You agree to buy 100 barrels of oil at $75 a barrel two months from now. The oil in this scenario is often called the "underlying asset" or the "basis."

Time to put the two parts together. Being "long the basis" involves a future position where you are otherwise betting that the underlying asset will go up in value, but you're using the futures market to hedge that situation.

You own an oil drilling business in Oklahoma. Your profits depend on oil prices being high. All day long, you pull oil out of the ground and sell it. You make money when you can sell it for a higher price than it cost to suck it out of the dirt. You are "long" oil. Like, really long.

But you worry about a sudden drop in oil prices. It would screw up your operations for prices to fall below a certain level. So you use the futures market to hedge. You enter into a contract to sell 10,000 barrels of oil at $75 a barrel. Now, no matter what happens, you'll definitely get $75 a barrel for that oil.

Meanwhile, you might have another 20,000 barrels that you leave unhedged. For these, you'll gamble on the spot price, hoping its above $75 a barrel.

For the 10,000 barrels where you've entered the futures contract, you are "long the basis." You're overall position is long in oil...but you've entered the hedging deal for part of it to make sure you don't get screwed if something bad happens.

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