Futures contract rolling refers to using the profits from the original position to open more positions, thereby expanding the value of the position. This process is called rolling positions, which can be understood as a snowball effect where the position grows larger.
This sounds simple, but in actual operations, novice users will encounter various problems, such as:
How is the margin and liquidation price calculated after increasing the position?
Why did my liquidation come faster after increasing my position?
If liquidation occurs, will it happen together or will the one that was opened first liquidate first?
This tutorial article will answer the above questions together with me!
Before understanding rolling positions, let's first look at the specific calculation method for the liquidation price. The calculation methods differ for different opening modes (none of the following calculations take into account the maintenance margin rate and fees):
1. Isolated margin mode
In isolated margin mode, positions will be allocated a certain amount of margin, which is independent of the trader's account balance. This allows traders to control account risk, and the maximum loss they need to bear when triggering liquidation is the corresponding position margin.
The calculation formula is as follows: (The case is a forward contract, USDT based, and all the following cases only consider long scenarios; short scenarios can be calculated by the users themselves.)
When position losses > position margin, liquidation is triggered, that is
(Opening price - Liquidation price) * Position size > Initial margin + Additional margin
Suppose a BTC forward contract has a face value of 0.01 BTC, and User A buys 10 contracts to go long at a price of 20,000 USDT using 20x leverage. If no additional margin is added, then
(Opening price: 20,000 USDT - Liquidation price) * Position size (0.01 BTC * 10 contracts) > Initial margin (100 USDT)
Calculation shows: Liquidation price <19,000 USDT, which means that the price will be liquidated when it drops to 19,000 USDT.
If User A adds an additional 500 USDT as margin after opening a position, then
(Opening price 20,000 USDT - Liquidation price) * Position size (0.01 BTC * 10 contracts) > Initial margin (100 USDT) + Additional margin (500 USDT)
Calculation shows: Liquidation price <14,000 USDT, which means that the price will only be liquidated when it drops to 14,000 USDT.
From the above calculation, we can also see that additional margin can delay the liquidation timing.
In the isolated margin mode, unrealized profits cannot be used to increase positions. Many novices will wonder why their unrealized profits cannot be used to roll over positions; that is because they are using isolated margin mode, and only the unrealized profits in the cross-margin mode mentioned below can be used to increase positions.
2. Cross-margin mode
Compared to isolated margin mode (fixed liquidation price), the liquidation price in cross-margin mode may change continuously because the available balance is affected by other positions.
In cross-margin mode, the initial margin occupied by each position is independent of the account balance, but the remaining balance is shared by all positions, and the available balance will be affected by the unrealized profits and losses of all existing positions.
Example 1
In a cross-margin mode, suppose Trader A wants to open a long position of 1 BTC at a price of 20,000 USDT using 50x leverage. The current available balance is 2,000 USDT.
In the case of a total sustainable loss of 2,000 USDT, the liquidation price of the position is 18,000 USDT.
Trader A accepts this level of risk and opens a position. The system will occupy 400 USDT from their available balance as the initial margin for opening the position.
Available balance = 2,000 - 400 = 1,600 USDT
Example 2
After a period of time, the price rises to 22,000 USDT, and Trader A's unrealized profit is 2,000 USDT.
Total sustainable loss = Available balance + Initial margin + Unrealized profit
= 1,600 + 400 + 2,000
= 4,000 USDT
In the case of a total sustainable loss of 4,000 USDT, the liquidation price of the position is 18,000 USDT.
Based on the above logic, we can derive the calculation formula for the liquidation price as follows (long scenario):
There are unrealized profits:
(Opening price - Liquidation price) * Position size = Available balance + Initial margin
There are unrealized losses:
(Current mark price - Liquidation price) * Position size = Available balance + Initial margin
The two formulas above reveal a principle: Unrealized profits do not affect the original position's liquidation price, but unrealized losses bring the liquidation price closer to the mark price.
After understanding the calculation of the liquidation price in cross-margin mode above, let's see how different increases in positions affect the liquidation price, including completely hedged scenarios, incomplete hedged scenarios, and different contract position scenarios.
The following is an example of the calculation of the liquidation price in cross-margin mode (excluding fees).
Example 1 (completely hedged)
In cross-margin mode, complete hedging can only occur when holding the same number of the same contract. For example, a trader holds 1 BTC long position and 1 BTC short position in the BTCUSDT cross-margin mode.
Completely hedged positions will not be liquidated, as the unrealized profits of one position will offset the unrealized losses of another position.
Example 2 (partial hedge)
Suppose Trader B holds the following two positions under 50x leverage, with the current available balance of 5,000 USDT. The current mark price is 20,000 USDT.
The short position in this case will never be liquidated because the amount of the long position is greater than the short position. As the price rises, the unrealized profits of the long position will always be greater than the unrealized losses of the short position.
For long positions, when calculating the liquidation price, only the net risk exposure of the position needs to be considered: abs(long position - short position) = abs(2 BTC - 1 BTC) = 1 BTC.
Initial margin = (1 × 22,000) / 50 = 440 USDT
Available balance = 5,000 USDT
(Current mark price 20,000 USDT - Liquidation price) * Position size (1 BTC) = Available balance (5,000 USDT) + Initial margin (440 USDT)
Liquidation price = 14,560 USDT
Example 3 (positions of different contracts)
Trader C currently holds the following two positions, and the account available balance is 2,500 USDT.
For the BTCUSDT position,
(Current mark price: 19,500 USDT - Liquidation price) * Position size (1 BTC) = Available balance (2,500 USDT) + Initial margin (200 USDT)
So the liquidation price for the BTC position = 16,800 USDT
For the ETHUSDT position,
(Liquidation price - Current mark price: 2,000 USDT) * Position size (10 ETH) = Available balance (2,500 USDT) + Initial margin (400 USDT)
So the liquidation price for the ETH position = 2,290 USDT
Suppose Trader C opens a short position in ARBUSDT. The position details are as follows:
New available balance = 2,500 - 500 (additional unrealized losses of BTCUSDT long position) - 240 USDT (initial margin of ARBUSDT) = 1,760 USDT
The new liquidation price for each position will be calculated as follows:
For the BTCUSDT long position,
(Current mark price: 19,000 USDT - Liquidation price) * Position size (1 BTC) = Available balance (1,760 USDT) + Initial margin (200 USDT)
So the liquidation price for the BTC position = 17,040 USDT
For the ARBUSDT position,
(Liquidation price - Opening price: 0.6) * Position size (10,000 ARB) = Available balance (1,760 USDT) + Initial margin (240 USDT)
So the liquidation price for the ARB position = 1.1 USDT
For the ETHUSDT position,
(Liquidation price - Opening price: 2,000 USDT) * Position size (10 ETH) = Available balance (1,760 USDT) + Initial margin (400 USDT)
So the liquidation price for the ETH position = 2,200 USDT
Let's compare the liquidation prices of BTC and ETH before and after increasing the position:
It can be seen that when multiple positions use the same asset (USDT) as margin in cross-margin mode, whenever the unrealized losses of the losing position increase, the liquidation price of the position will approach the mark price, meaning that all positions are more likely to be liquidated.
The reason this happens is that the shared available balance will be used to offset the unrealized losses of the losing position, so the available balance will decrease.
When the available balance is 0, the liquidation prices of the two positions will no longer change, as at this point, the position is maintained by the initial margin of the position, which is not shared between positions.
