Huobi Futures, the derivatives trading platform owned by world-leading crypto exchange Huobi, announced the launch of the “Locked Margin Optimization Function” to improve asset utilization and to reduce position margin for users with both long and short crypto futures.
Let’s say you hold both long positions and short positions of a particular coin – let’s say BTC, without optimization, the position margins are calculated separately for long and short positions. With the Locked Margin Optimization algorithm, utility on the same coin type contracts types is maximized, thus reducing the position margin for users with both long and short positions.
A lower position margin across the contracts means the more available margin for traders hence higher fund utilization and a lower risk of triggering liquidation.
The Locked Optimization Feature will offer users 9 cryptocurrencies and 36 trading pairs on the weekly, bi-weekly, quarterly, and bi-quarterly futures on Huobi Futures.
In this article, we dig deep on what is locked margin optimization and give an example of how it lowers your position margin on the same crypto contracts.
Understanding position margin
The position margin of a trader is calculated as the total contract value (No. of contracts * contract value) divided by the leverage ratio and contract price. For example, the position margin for a trader with 10 contracts of BTC futures each costing $100 USD (total value is $1000) and Bitcoin’s price is at $10,000, a trader with a leverage ratio of 25x (leverages up to 125x on Huobi Futures) will have a margin position of:
So; $1000/ 10000/ 25 = 0.004 BTC as position margin.
Now that we understand position margin, let’s look at how locked margin optimization helps traders reduce the position margin giving them more assets to place trades with.
The Locked Optimization Function
Huobi Futures is introducing the Locked Optimization model simply aiming at reducing the overall effect of having different positions on the same crypto contract. The locked margin optimization function optimizes the utility of assets by minimizing the effect of the same type of futures in positions taken. Look at the formula below:
Locked margin = (Total long and short position margin – Total locked margin of the same type contracts of one coin) *Optimization ratio for the same type futures – Total locked margin of all types contracts of the coin
So far, Huobi offers four different types of futures including the weekly, bi-weekly, quarterly, and bi-quarterly contracts. To understand this formula better we will lead with examples on how to get the locked margin for same type futures i.e. is a user holds long and short contracts on just one of the four types e.g. only weekly futures, and locked margin on a user holding long and short contracts of a coin but with different types of futures e.g. weekly and bi-quarterly.
Example of Locked Margin Optimization
Imagine Messi holds 1000 long contracts and 800 short contracts of BTC weekly futures, each trade leveraged at 20x. The contracts trade at $100/contract with the price of weekly futures currently at $9,500.
Using the formula above of position margin, the long contract position margin lies at 0.5263 BTC and the short positions contract at 0.4210 BTC.
To get the locked margin, we need to calculate (i) the total long and short position margin (ii) the total locked margin of same* type futures (iii) the total locked margin for all* type futures and (iv) the optimization rates which are 100% for same type futures and 50% for several type futures.
Total long and short position margins = Total long position margin + Total short position margin
Total L&S position margin=0.5263+0.4210=0.9473 BTC
NB: This is the total margin required before the implementation of the “Locked Margin Optimization”.
Step 2 :
The total locked margin for same type futures
We calculate the total locked margin for the same type futures by taking the minimum value between the long and short position margins contracts i.e. min (0.5263, 0.4210) = 0.4210, which is the short position margin.
If let’s say Messi had weekly, bi-weekly and quarterly futures contracts, his total locked margin for same type futures would be;
The total locked margin for all type futures
In our example, Messi only has one type of futures contract, the weekly BTC futures hence he doesn’t have a locked margin for all type futures i.e. TLMall = 0. However, if Messi held let’s say the weekly, bi-weekly and quarterly contracts;
The TLMsame is then subtracted from the minimum value obtained in the equation above to get the total locked margin for all type contracts.
Finally, optimize the value obtained step 1 after subtracting the value of step 2 and optimize the value obtained in step 3 i.e.
As seen above, the overall position margin needed for both the long and short contracts on the BTC weekly futures is lower than the previous addition of single position margins. The Locked Margin Optimization ensures that the users’ funds utility is maximized and lowering the overall trading cost for users – in some cases up to 50% of the cost. High-frequency traders and big-time traders are benefited most with this new mechanism.