Why Premium Index Matters

Premium Index is one of the most underestimated yet powerful metrics in derivatives trading. Many screener users see this chart but don’t understand what it represents or how to apply it in practice.

The most important thing to understand from the start:

Premium Index is not an entry signal.

It is a market regime and derivatives pressure indicator.

It helps you understand:

• which side dominates — longs or shorts,
• whether pressure is increasing or being released,
• whether continuation or a regime shift is more likely.

What Premium Index Is (Plain Explanation)

Premium Index represents the difference between:

• the perpetual futures price,
• and the index price (spot reference price).

Simply put:

• Premium Index > 0 → the perpetual trades above spot (premium),
• Premium Index < 0 → the perpetual trades below spot (discount).

This reflects a derivatives imbalance, not price direction.

Important:

• Price can rise while Premium is negative,
• Price can fall while Premium is positive.

Premium Index does not predict direction — it shows tension between futures and spot.

Premium Index and Funding: The Key Relationship

On most exchanges, funding is derived from the Premium Index (plus interest rate and caps).

Easy way to remember:

• Premium Index is the cause,
• Funding is the payment for that imbalance.

Practical takeaway:

• Premium often changes before funding,
• Funding may be capped, while Premium is already extreme.

This makes Premium Index a faster and cleaner signal than funding.

How Premium Index Looks on a Chart

Typically, users see:

• a lower sub-chart,
• values oscillating around zero,
• occasional sharp spikes.

The main mistake is trying to treat it like RSI or MACD.

The Biggest Beginner Mistake

❌ “Premium is negative — I should buy”

❌ “Premium is positive — I should short”

That’s wrong.

The only correct question is:

Is the imbalance still increasing, or is it being released?

How to Read Premium Index Correctly

1️⃣ The Sign Shows the Regime, Not the Signal

• Premium > 0 → long-dominated regime
• Premium < 0 → short-dominated regime

This is context, not an entry.

2️⃣ Dynamics Matter More Than the Number

Focus on direction, not value:

• Premium expanding → pressure increasing
• Premium compressing → pressure increasing the other way
• Premium stabilizing → pressure weakening
• Premium moving toward zero → imbalance being resolved

Very often:

Premium starts to break before price does.

3️⃣ Extremes Are Warnings, Not Entries

Extreme Premium values mean:

• the market is heavily imbalanced,
• the probability of normalization increases.

But:

• entries must come from price structure,
• Premium alone is never a trigger.

Three Practical Ways to Use Premium Index

1️⃣ Regime Filter (Most Important)

Premium Index helps avoid trading against the market:

• Longs are safer when:
• Premium ≥ 0, or
• Premium is rising toward 0 from negative.
• Shorts are safer when:
• Premium ≤ 0, or
• Premium is falling from positive.

This dramatically reduces toxic trades.

2️⃣ Imbalance Resolution (Mean Reversion Context)

A powerful scenario:

• Premium was extreme,
• Premium stops worsening,
• Premium starts moving toward zero.

Often precedes:

• bounces,
• reversals,
• the end of dumps or pumps.

Entries still require price confirmation (reclaim, VWAP, HL/LH).

3️⃣ Impulse Exhaustion Confirmation

In an uptrend:

• price rises,
• Premium stops rising,
• OI stops rising.

The impulse is exhausting.

Downtrends behave symmetrically.

Trade Examples Using Premium Index

Example 1: GMTUSDT — Long with Extremely Negative Funding

Market context

GMTUSDT had funding around −0.8% with a 1-hour funding interval, indicating a strong short-side imbalance.

Premium Index behavior

• Premium was below zero,
• but stopped deteriorating,
• stabilized near extreme values.

Trade logic

• Price stopped falling,
• Premium stopped increasing pressure,
• Funding provided a tailwind.

The long was entered on a pullback, not simply because Premium was negative.

Conclusion

Premium Index showed that pressure was no longer increasing, making a long acceptable once price confirmed.

Example 2: DEEPUSDT — Short After a Premium Index Spike at Highs

Market context

Price was at highs after a strong rally. Premium Index showed an extreme spike — the imbalance was fully expressed.

What followed

• Premium stopped expanding,
• Funding normalized:
• from ~−1% to ~−0.2%,
• Price failed to make new highs.

Trade logic

• Forced pressure ended,
• Imbalance began to unwind,
• Market transitioned into distribution.

The short was taken after stabilization, not at the spike.

Conclusion

Premium Index helped identify a regime shift, not guess a top.

Common Screener User Mistakes

• Looking only at the Premium sign
• Ignoring dynamics
• Trading extremes without structure
• Using Premium as an entry signal
• Ignoring liquidity (Premium is noisy on illiquid coins)

Quick Checklist Before a Trade

Ask yourself:

• Is Premium expanding or compressing?
• Does it support my trade direction?
• Is there confirmation from price?

If not — don’t use Premium at all.

Final Thoughts

Premium Index is a context and pressure indicator, not a buy/sell button.

It helps you:

• see impulse exhaustion earlier,
• avoid trading against active squeezes,
• filter low-quality trades.

On screeners, Premium Index is shown alongside price, OI, and funding so traders can instantly understand the market regime, not trade blindly.