Futures Premium Analysis
What is Futures Premium
Futures premium refers to how much higher the futures price is compared to the spot price. It's the same concept as basis, but premium is typically expressed as a percentage (%) to facilitate comparison across different time periods.
Futures Premium (%) = (Futures Price - Spot Price) / Spot Price x 100
If spot is $100,000 and futures is $103,000, the premium is 3%.
Annualized Premium
Why Annualize Premium
It's difficult to directly compare premiums of futures with different expiration dates. Which is higher: 2% on a 1-month contract or 5% on a 3-month contract? Annualizing allows for fair comparison.
Annualized Premium = Premium (%) x (365 / Days to Expiry)
Example
| Expiry | Premium | Days Left | Annualized |
|---|---|---|---|
| 1-week | 0.5% | 7 days | 26.1% |
| 1-month | 2% | 30 days | 24.3% |
| Quarterly | 5% | 90 days | 20.3% |
In this example, the weekly contract has the highest annualized premium. This indicates particularly strong short-term leveraged long demand.
Interpreting Premium Levels
Annualized Premium Reference
| Annualized Premium | Status | Market Interpretation |
|---|---|---|
| Below 0% | Backwardation | Extreme bearishness/fear. Possible bottom |
| 0-5% | Low premium | Bearish to neutral. Lack of interest |
| 5-10% | Normal premium | Healthy bullish sentiment |
| 10-20% | High premium | Strong upside expectations. Active leverage |
| 20-40% | Overheated | Extreme bullishness. Watch for corrections |
| Above 40% | Bubble | Only observed near historical tops |
Historical Premium
When Bitcoin quarterly futures annualized premium exceeded 30%, it was typically near market tops.
- February 2021: Annualized premium ~40% followed by May crash
- October-November 2021: Annualized premium ~25% followed by prolonged decline
- March 2024: Annualized premium ~25% followed by short-term correction
CME Futures Premium
CME's Special Position
CME (Chicago Mercantile Exchange) Bitcoin futures represent the regulated futures market primarily used by US institutional investors. CME premium has special significance as it reflects institutional market sentiment.
CME vs Crypto Exchanges
| Aspect | CME Futures | Binance, etc. |
|---|---|---|
| Users | Institutions, funds | Retail + institutions |
| Regulation | US CFTC regulated | Varies by country |
| Settlement | Cash settled | Coin/USDT settled |
| Expiry | Monthly/quarterly | Quarterly + perpetual |
| Premium Interpretation | Reflects institutional sentiment | Reflects overall market sentiment |
Interpreting CME Premium
- High CME premium: Institutions betting on Bitcoin appreciation
- Declining CME premium: Institutional interest fading or increased hedging demand
- CME backwardation: Institutions extremely bearish. Very rare situation
When CME premium exceeds crypto exchange premium, institutional demand is stronger than retail demand, which is generally interpreted as a positive mid-to-long-term signal.
Cross-Exchange Premium Differences
Why Premiums Differ Between Exchanges
Even for futures with the same expiry, premiums can vary between exchanges. This is because each exchange has different user compositions, liquidity, and leverage policies.
Cross-Exchange Arbitrage
If Exchange A has a 5% premium and Exchange B has a 3% premium, you could short on A and long on B to pursue the 2% difference. However, this requires capital on both exchanges, and exchange risk doubles.
Implied Premium in Perpetual Futures
Perpetual futures have no expiry, making direct premium measurement difficult. However, you can calculate Implied Premium through funding rates.
Implied Annualized Premium = Funding Rate x 3 x 365
If the 8-hour funding rate is 0.03%:
- Daily: 0.03% x 3 = 0.09%
- Annualized: 0.09% x 365 = 32.85%
Comparing this figure to dated futures annualized premium helps determine which has higher leverage costs - perpetual or dated futures.
Premium and ETFs
Impact of Bitcoin ETFs
The introduction of spot Bitcoin ETFs has affected futures premium structure.
- Increased ETF demand: More spot buying leads to higher spot prices, potentially compressing premium
- ETF arbitrage: Buying ETF + selling futures promotes premium convergence
- Premium stabilization: More arbitrage participants reduce premium volatility
Since ETF introduction, extreme premium readings in Bitcoin futures have become less frequent.
Futures ETF vs Spot ETF
Futures-based ETFs (such as ProShares BITO) must roll futures monthly. In contango conditions, rollover costs occur, resulting in underperformance versus spot - known as "contango drag." Spot ETFs don't have this issue.
Monitoring Premium
How to Check
Futures premium can be monitored on these platforms:
- Coinglass: Compare premiums across exchanges and expiries at a glance
- Laevitas: Comprehensive derivatives analysis including options
- TradingView: Calculate directly from CME futures charts
Important Notes
- Premium naturally converges as expiry approaches, so always consider days to expiry
- Far-month contracts with low volume may have distorted premiums
- Observing trends is more important than single-point readings
Combining with Other Indicators
Premium + Exchange Flows
When futures premium is high but exchange reserves are declining, spot is flowing out while leverage demand concentrates in futures. This combination suggests an unstable upward structure.
Premium + Fear & Greed Index
When premium exceeds 20% annualized and the Fear & Greed Index shows extreme greed, multiple overheating warnings are triggered.
Summary
Futures premium quantifies the market's future price expectations, and annualizing enables comparison across time periods. CME premium reflects institutional sentiment while crypto exchange premium reflects overall market sentiment. Annualized premium above 20% is an overheating warning, and entry into backwardation signals extreme fear. Calculating implied premium from perpetual funding rates enables comparison with dated futures.
Next article: Derivatives Volume and Market Structure - Who Moves the Market