How Does High Volatility Affect Margin Requirements and Liquidation Risk?
High volatility increases the risk of rapid price movements, which can quickly erode a trader's margin. Exchanges often increase margin requirements during volatile periods to create a larger buffer against sudden losses.
This higher requirement means traders must post more collateral or reduce their leverage. Consequently, high volatility significantly increases the risk of liquidation for existing leveraged positions.
Glossar
Margin Requirements
Definition ⎊ Margin requirements refer to the minimum amount of capital an investor must deposit and maintain with a broker or exchange to open and sustain a leveraged position in derivatives trading.
High Volatility
Instability ⎊ High volatility in cryptocurrency, options, and derivatives signifies amplified and accelerated price movements, exceeding historical norms and creating substantial risk exposures for market participants.
Collateral
Requirement ⎊ Collateral in derivatives trading represents the assets pledged by a market participant to secure their obligations, mitigating the counterparty risk associated with open positions.
Leverage and Liquidation
Amplification ⎊ Leverage, within cryptocurrency, options, and derivatives, represents the utilization of borrowed capital to magnify potential investment returns, fundamentally altering risk-reward profiles.