Premium Index
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Key Takeaway
The percentage difference between the mark price and the index price; the primary component of the funding rate calculation; reflects the balance of demand between long and short sides of the perpetual futures market.
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What Is Premium Index?
The percentage difference between the mark price and the index price; the primary component of the funding rate calculation; reflects the balance of demand between long and short sides of the perpetual futures market.
How Premium Index Works
Frequently Asked Questions
What is the premium index in simple terms?
The premium index measures how far the perpetual futures price has moved above or below the actual spot price, expressed as a percentage. If the perpetual is trading 0.05% above the multi-exchange spot average, the premium index is +0.05%. This percentage then directly drives the funding rate: positive premium means longs pay shorts; negative premium means shorts pay longs. The premium index is essentially a real-time dashboard showing which side of the market — leveraged buyers or sellers — is currently dominant and by how much.
How does the premium index work in perpetual futures markets?
The premium index is calculated continuously as (Mark Price − Index Price) / Index Price. Because it uses the mark price — which is smoothed and derived from multiple exchanges — rather than last-traded price, it resists brief manipulation. The formula Funding Rate = Premium Index + clamp(Interest Rate − Premium Index, −0.05%, 0.05%) shows how the premium index feeds the funding rate, with the clamp function preventing extreme readings from producing outsized payments in a single period. The result is a self-correcting system where a rising premium index generates rising funding costs that pressure the dominant side to reduce their position.
How do traders use the premium index to make better decisions?
Traders use the premium index in three ways: (1) As an early funding rate indicator — the premium index updates continuously, while funding is only settled every eight hours; watching the premium index between settlements previews whether the next funding payment will be larger or smaller than the last. (2) As a crowding measure — a premium index that persistently stays positive and elevated signals strong long-side dominance, a precursor to potential fragility. (3) As a context check during volatile periods — if the premium index spikes dramatically but quickly reverts, it may reflect a temporary order book imbalance rather than a genuine shift in positioning demand.
Common Misconceptions About Premium Index
The premium index is calculated from the last-traded price on the futures exchange
The premium index uses the mark price in its numerator, not the last-traded price. The mark price is derived from the multi-exchange index price with a smoothed basis adjustment — it is not the price of the most recent trade on the exchange's order book. This distinction is important because the mark price is manipulation-resistant; a single large order moving the last-traded price by 1% might move the mark price by a far smaller amount, and thus the premium index would respond proportionally less than a naive comparison of last-traded futures price to spot would suggest.
A large premium index means the funding rate will be equally large
The clamp function in the funding rate formula bounds how much the interest rate component can contribute, but the premium index itself feeds through to the funding rate approximately directly when the premium is large. However, the funding rate is the rate per settlement period (eight hours), while the premium index is calculated in real-time. At the settlement moment, the exchange uses the average premium index over the settlement period — not the instantaneous reading — which smooths out brief spikes and prevents a single-moment extreme from generating an extreme single-period payment.
The premium index and the funding rate are the same metric
The premium index is a component of the funding rate, not the same metric. The funding rate formula includes an interest rate component: Funding Rate = Premium Index + clamp(Interest Rate − Premium Index, −0.05%, 0.05%). When the premium index is large relative to the interest rate (which is typically around 0.01%), the clamp reduces the interest rate's contribution and the funding rate approximates the premium index closely. But at low premium index values, the interest rate component contributes meaningfully, and the funding rate differs from the premium index.