To long the basis means to employ a type of investment strategy in which a short hedge position is combined with a long cash position in the marketplace. This is typically achieved by purchasing commodities and then hedging on the investment by creating and selling futures contracts on those commodities. Using this strategy provides a couple of important benefits, including creating a guarantee that the owner of the commodity will be able to sell at a decent price even if the market prices move under the price noted in the futures contract.
With a long the basis approach, an investor purchases some type of commodity, such as lumber, oil, or some type of precious metal like gold or silver. Since many commodities do have a tendency to significantly fluctuate in price based on what is happening in the market, the owner will often sell futures contracts on the commodity in question. This type of contract locks in a minimum price that the investor will be able to receive for the commodity at some time in the future, and provides protection from those fluctuations.
One of the chief benefits of a long the basis method is that the investor is protected from incurring a loss. Assuming that the pricing included in the futures contract allows the investor to recoup the original purchase price plus a little more, then at least some type of profit is insured, no matter what is happening in the marketplace. Given the volatile nature of commodities and the chances for factors such as political upheavals and natural disasters to impact price movements, going with a long the basis approach is a prudent move for investors who tend to be more conservative.
There is some risk associated with the execution of a long the basis strategy. While the chance of losing money on the investment is very limited, there is also the possibility of missing out on a significant amount of profit if current market prices are much higher than the prices agreed upon in the futures contract at the time the contract matures. For this reason, it is important for commodity owners to consider all relevant data when determining what type of pricing to include in the contract. Assuming that the commodity market prices are performing as anticipated, the owner is likely to maximize his or her gains. Should the market for the commodity in question increase unexpectedly, he or she still makes a profit, but would have made more if there were no futures contract that locked in a certain price.
