Liquidation Process (Options)

Under the INR margin system, your account's maintenance margin (MM) rate is the primary metric for assessing risk. Liquidation is triggered when the MM rate reaches 100%.

Note: Long Option positions (Option Buyers) are not subject to liquidation, as the maximum loss is limited to the premium and trading fees paid.

Margin Modes & Liquidation Triggers

For USDT options, liquidation procedures vary based on the margin mode—Regular Margin or Portfolio Margin—each with different parameters impacting the account MM calculation.

Regular Margin:

• Account MM Rate = Maintenance Margin / Margin Balance
  
  

• The risk of liquidation is evaluated using the margin balance, initial margin, and maintenance margin.
  
  

• When the MM rate hits 100%, liquidation is triggered. The system first liquidates USDT Perpetual positions.
  
  

• If the MM rate remains at 100% after this, all Short Options positions are liquidated next, prioritizing those that release the most margin. The liquidation engine fills orders based on order book liquidity; if insufficient, Pi42 uses OTC market makers to close positions and reduce risk.

Important: Pi42 does not seize customer margins during liquidation. Instead, a liquidation fee is charged to maintain the insurance pool for risk coverage. 

Portfolio Margin Mode: Liquidation Process

In portfolio margin mode, liquidation risk is assessed based on account equity, initial margin, and maintenance margin.

• Account MM Rate = Maintenance Margin / Equity

• Equity = Margin Balance + Option Market Value
  
  

Note: Traders should monitor both the maintenance margin and initial margin to evaluate their account risk.

When the MM rate reaches 100%, liquidation is triggered. The process is as follows:

1. All open orders in the account are canceled.
   
   

2. If the MM rate remains at or above 100% after canceling orders, the laddered liquidation system will progressively close positions based on the amount of margin released.

Important: Pi42 does not seize customer margins during liquidation. Instead, a liquidation fee is applied to support the insurance pool and cover risk factors.

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Example: Liquidation Process for Trader A

Suppose Trader A has the following positions:

• Long Perpetual Position: 300,000 USDT

• Short Options Position: 500,000 USDT

• Open Limit Order: 1,000,000 USDT

When the account MM rate reaches 100%, the liquidation process is as follows:

1. Cancel Open Orders:
   The 1,000,000 USDT limit order is canceled to free up margin.
   
   

2. Assess Positions for Liquidation:
   The liquidation engine calculates which positions, if closed, would release the most margin. It considers the 300,000 USDT Perpetual long and the 500,000 USDT Options short positions.
   
   

3. Prioritize Positions:
   If closing part of the short options position (e.g., 200,000 USDT) would free up the most margin, the engine will start liquidating that position first.
   
   

4. Liquidation Execution:
   
   Scenario A: If the order book has enough liquidity at or near the mark price (e.g., standing orders for 400,000 USDT and executable quotes for 300,000 USDT), the liquidation engine will close the entire 200,000 USDT position using the order book.
   
   Scenario B: If the order book lacks sufficient liquidity at the mark price (e.g., only 150,000 USDT can be sold at reasonable prices), the engine will:
   
   

   • Close 150,000 USDT via the order book
     
     

   • Liquidate the remaining 50,000 USDT via an OTC platform, where external market makers complete the transaction
     
     

5. High-Risk Escalation:
   If, after these steps, the account’s MM rate remains very high (e.g., over 160%), the liquidation engine will fully take over and liquidate the entire position to control risk.
   
   

Summary:
The liquidation engine acts in stages—canceling orders, evaluating which positions to close, executing liquidations via the order book or OTC market makers, and escalating to full liquidation if risk persists.