Leverage & Margin Deep Dive

How Leverage Actually Works

Leverage allows you to control a position larger than your deposited capital (margin). When you use 10x leverage, you deposit $1,000 to control a $10,000 position. The exchange or broker lends you the difference.

This is not free money - it's borrowed exposure. The borrowed portion accrues funding costs, and your margin serves as collateral that can be seized if the trade goes against you.

Initial Margin vs. Maintenance Margin

• Initial margin: The minimum collateral required to open a position. At 10x leverage, initial margin is typically 10% of position value.
• Maintenance margin: The minimum collateral required to keep the position open. This is lower than initial margin (often 5% or less). If your equity drops below this level, liquidation begins.

At 100x leverage, a 1% adverse move wipes out your entire margin. Bitcoin routinely moves 3-5% in a single hour.

Cross Margin vs. Isolated Margin

Most exchanges offer two margin modes:

• Isolated margin: Only the margin allocated to a specific position is at risk. If the position is liquidated, you lose only that margin. Other positions and your remaining balance are unaffected.
• Cross margin: Your entire account balance serves as margin for all positions. This gives you a wider liquidation buffer, but if one position goes badly wrong, it can drain your entire account.

Cascading Liquidation

In volatile markets, liquidations can trigger more liquidations in a cascade:

• Price drops → overleveraged longs get liquidated → their positions are market-sold → this pushes price down further → more liquidations trigger → price drops more.
• This positive feedback loop is called a liquidation cascade or "long squeeze" (or "short squeeze" in the opposite direction).
• Cascades explain why crypto markets often see sudden 10-20% moves in minutes - it's not just selling, it's forced selling from liquidations.

Funding Rates

In perpetual futures (common in crypto), there are no expiration dates. Instead, a funding rate mechanism keeps the futures price aligned with the spot price:

• When funding is positive, longs pay shorts. This means it costs money to hold a long position.
• When funding is negative, shorts pay longs.
• Funding is typically charged every 8 hours.
• In extreme bullish sentiment, funding can be very high - holding a leveraged long becomes expensive.

Effective Leverage vs. Notional Leverage

There's a difference between the leverage the exchange offers and the leverage you actually use:

• Notional leverage: Position size / margin deposited. If you deposit $1,000 and open a $10,000 position, notional leverage is 10x.
• Effective leverage: Position size / total account equity. If your total account is $50,000 and you open a $10,000 position, effective leverage is only 0.2x - very conservative.

Professional traders often use high notional leverage on individual positions but keep effective leverage low across their portfolio.

Practice

Key Takeaways

De Greeks

De Greeks meten de gevoeligheid van een optieprijs voor verschillende factoren:

• Delta: Hoeveel de optieprijs verandert per beweging van de onderliggende asset.
• Gamma: De snelheid waarmee delta verandert.
• Theta: Tijdsverval — hoeveel waarde de optie per dag verliest.
• Vega: Gevoeligheid voor veranderingen in volatiliteit.

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