Sizing a leveraged position from the loss you will accept: liquidation distance, margin asset, and funding as a cost

A perpetual futures venue quotes leverage as a headline: the multiple of collateral a trader may hold in notional. That number describes the venue’s maximum, not the trader’s plan. Binance’s documentation of its liquidation mechanics states the rule that actually governs a position: it is liquidated when the collateral available to it falls below the maintenance margin the position requires. Everything about sizing follows from keeping that from happening on the moves the trader expects to survive.

The approach that follows works backward from two numbers the desk chooses, rather than forward from a number the venue offers.

Two numbers, take the smaller

The first number is the loss the desk is prepared to take if the view is wrong. That is a dollar amount, or a share of the book, set by the risk budget and not by conviction. Divide it by the adverse price move at which the view would be abandoned and the result is a maximum notional: the size at which being wrong by that much costs exactly the accepted loss.

The second number is the distance to liquidation that must remain after the largest move the position is expected to endure without being closed. Every venue publishes how its liquidation price is computed from entry price, leverage and maintenance margin. Hyperliquid’s documentation, for instance, describes liquidation as triggered when account equity falls below the maintenance margin, with positions closed against the order book and a backstop vault taking over if that fails. The desk sets the required buffer from the asset’s realized volatility and the gap risk of the venue, and the maximum notional is whatever size leaves that buffer intact.

Position size is the smaller of the two. In practice the two constraints are related, since a tighter loss limit implies a smaller position and therefore a wider liquidation distance, but they are set independently and checked separately, because they fail for different reasons. One protects the book from the view being wrong. The other protects it from the venue acting before the desk can.

The margin asset

Margin posted in the asset being traded shrinks as the position loses. A long position collateralized by the same asset suffers twice on a fall: the position loses and the collateral backing it is worth less. Margin posted in a stablecoin does not have that property. Where a venue allows the choice, stablecoin margin makes the liquidation distance a function of the position alone rather than the position and its collateral together.

The choice between cross and isolated margin belongs to the same decision. Hyperliquid’s margining documentation describes cross margin, in which all positions share the account’s collateral, as the default because it is the most capital efficient. That efficiency is the risk: a winning position can prop up a losing one until both are lost together. Isolated margin confines a position’s losses to the collateral assigned to it. The desk decides per position which behavior it wants, and a position taken to add exposure to a specific view is usually one it wants isolated.

• Maintenance margin: the minimum collateral a position must hold; liquidation begins when equity falls below it
• Liquidation price: the price at which equity meets maintenance margin, a function of entry, size, collateral and the venue’s parameters
• Mark price: the price the venue uses to assess margin, typically a blend of index and order book designed to resist manipulation
• Auto-deleveraging: the mechanism by which a venue closes profitable positions against a bankrupt one when its insurance fund is insufficient

Funding as a cost of the view

A long perpetual pays funding when the market is net long, which is usually when a desk is trying to add long exposure. Over a holding period of days the payment can be a material share of the move the position was opened to capture. It should be tracked against the view as a cost, in the same way that financing is a cost of a leveraged spot position, so that a position which is right on direction and wrong on carry is recognized as such. Where a dated future offers the same exposure at a lower implied rate, the choice between them is part of the trade.

Exits written at entry

A sized position carries three exits from the moment it opens. The level at which the view is wrong and the position is closed, which is the loss limit expressed as a price. The level or date at which the view has paid and the exposure is closed or rolled into spot. And the liquidation distance at which size is reduced regardless of view, which sits well above the venue’s own trigger. Liquidation management, the continuous work of topping up margin and reducing size, runs on top of all three. Its purpose is to make sure the venue’s engine never has to act, because a liquidation is a fill at the worst price of the day on the day the desk least wants it.

Leverage is a tool for holding a view efficiently. Sized from the loss the desk will accept and the distance it needs from the engine, it does that. Sized from the multiple the venue permits, it is a way of finding out where the liquidation price is.