Before understanding the liquidation of options, we need to understand a concept: the agreement price.
What is the Agreement Price?
The agreement price is generated by a certain percentage of the mark price fluctuation, divided into the highest agreement price and the lowest agreement price. The fluctuation ratio of different option contracts is different.
The agreement price has two purposes, one is to calculate the position value and judge whether its equity is negative; the other is that when reducing the position, there is insufficient liquidity in the market, then part of the position will be taken over at the agreement price.
Calculation Formula
Note:
- The amount of long positions is positive and the amount of short positions is negative.
- The position value is the sum of the value of each contract position.
- The margin ratio calculation only considers the ask orders margin
Liquidation Process
- Regularly calculate the equity, equity at the agreement price and the margin ratio of the user's account.
- If the equity at the agreement price is negative, all positions will be taken over, and the equity will be reset to zero, that is, the account and the position will be reset to zero.
- If the margin ratio reaches 100% and the period for insurance recovery has expired, and the user has pending orders, the withdrawal will begin with the largest pending order until the margin ratio is less than 100% and the withdrawal will stop. During the withdrawal period, when the equity at the agreement price is negative, all positions of the user are taken over and the user's equity is returned to zero.
- If the margin ratio reaches 100% and the period for insurance recovery has expired, and there are no more pending orders to be withdrawn, the short position of the user will be reduced, starting with the market with the best liquidity. When the market is illiquid, the positions that cannot be filled in the market at the agreement price will be taken over until the margin ratio is less than 100% and the reduction will stop. During the reduction period, when the equity at the agreement price is negative, all positions of the user are taken over and the user's equity is returned to zero.
- If the margin ratio reaches 100% and the insurance recovery period has not expired, no operation is performed; if no margin call is sent, a margin call will be sent; if the margin ratio falls below 100% during the insurance recovery period, the margin call will be reset.
- If the margin ratio is between 80% and 100%, risk alerts will be sent regularly.
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