How Does Leverage Affect the Distance between the Liquidation and Bankruptcy Prices? ⎊ Path

How Does Leverage Affect the Distance between the Liquidation and Bankruptcy Prices?

Higher leverage reduces the distance between the liquidation price and the bankruptcy price. Leverage dictates the required margin for a position.

With high leverage, a smaller price movement is needed to deplete the margin to the maintenance level (liquidation) and then to zero (bankruptcy). A smaller gap means less buffer for the exchange to execute the liquidation order before the position becomes bankrupt and creates a deficit for the insurance fund.

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Glossar

Bankruptcy

Default ⎊ This state signifies a critical failure where a counterparty's obligations exceed their available collateral, often triggered in options or futures trading when losses cannot be covered.