Premium Index
The premium index measures how far a perpetual future's price sits above or below its underlying spot index. A positive premium means perps trade rich to spot because of excess long demand, a negative one means they trade cheap, and the figure feeds directly into the funding rate.
Why perpetual futures need a premium index
A perpetual future is a futures contract with no expiry date. Without an expiry, nothing forces its price to meet the spot price on a set day, so exchanges use the funding rate instead: regular payments between longs and shorts that pull the perp back toward spot. The premium index is the measurement that tells the funding mechanism how far and in which direction the perp has drifted.
The spot reference is an index price, usually a weighted average of the asset's price on several spot exchanges, so that one venue cannot set it alone.
How it is calculated
Details differ by exchange, but a common approach uses impact prices rather than the last trade. The impact bid and impact ask are the average prices at which a fixed, fairly large order would fill on each side of the order book. If the impact bid is above the index, the premium is positive; if the impact ask is below the index, it is negative. The result is sampled frequently, often every few seconds or every minute, and averaged over the funding period.
Many exchanges then set the funding rate as this average premium plus a small interest-rate component, limited by caps. Some also use the premium, or a moving average of the basis, when calculating the mark price that triggers liquidations.
A worked example
Say the bitcoin spot index is 50,000 while buyers on the perpetual are paying 50,100. The premium is 100 divided by 50,000, or 0.2%. If that persists across the funding period, funding turns positive and longs pay shorts. A trader holding a 10,000 USDT long might pay around 20 USDT per funding period at that level, an ongoing cost that grows the longer the premium lasts.
If the perp instead traded at 49,900, the premium would be minus 0.2%, and shorts would pay longs.
Pitfalls
A high premium shows crowded positioning and a cost for one side, not where the price will go next. Crowded longs paying high funding sometimes precede a long squeeze, but premiums can also stay elevated for weeks in strong markets. On thinly traded pairs a single large order can swing the premium sharply, and each exchange computes it differently, so readings from different venues are not directly comparable.
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Frequently asked questions
What does a positive premium index mean?
The perpetual is trading above the spot index, usually because more traders want to be long. Funding then tends to be positive, so longs pay shorts.
Is the premium index the same as the funding rate?
No. The premium index is one input. The funding rate is usually built from the average premium over the funding period plus an interest component, within limits.
Why do exchanges use impact prices instead of the last price?
Impact prices reflect what a sizeable order would actually pay. That makes the premium harder to move with a single small trade at an unusual price.
Related terms
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