How to close BitMEX contracts

Closing BitMEX perpetual contracts involves understanding settlement options, calculating position value, placing closing orders, and navigating leverage's impact for successful position management and risk mitigation.

Nov 12, 2024 at 09:48 pm

Understanding BitMEX Contract Closure

BitMEX, a leading cryptocurrency derivatives exchange, offers a diverse range of perpetual contracts for traders to speculate on the price movements of various digital assets. Unlike futures contracts, which have a fixed expiration date, perpetual contracts allow for indefinite trading, providing greater flexibility and potential for profit maximization. However, it is crucial to understand the process of contract closure to effectively manage your positions and mitigate risks.

Step 1: Understand the Different Contract Settlement Options

BitMEX offers three distinct settlement options for its contracts:

a) Cash Settlement: When the contract expires, the trader receives or pays the difference between the settlement price and the contract price in cash (i.e., BTC). This method is commonly used by traders who do not wish to physically receive or deliver the underlying asset.

b) Physical Settlement: Traders physically receive or deliver the underlying asset at the contract expiry, resulting in a transfer of ownership. This option is primarily intended for traders who wish to hold or dispose of the actual cryptocurrency.

c) Perpetual Settlement: Unlike futures contracts that have a predetermined expiration date, perpetual contracts do not expire. They can be traded continuously until the position is manually closed, allowing traders to hold their positions for extended periods.

Step 2: Calculate Your Position Value

Accurately determining your position value is essential before initiating the closing process. This involves calculating the difference between your entry price and the current market price. If the market price is higher than your entry price, you have an unrealized profit; if it is lower, you have an unrealized loss.

Example: If you bought 1 BTC at $40,000 and the current price is $45,000, your unrealized profit is $5,000 (45,000 - 40,000).

Step 3: Place a Closing Order

Once you have calculated your position value and determined the desired closing method, you can proceed with placing a closing order. BitMEX provides two types of closing orders:

a) Market Order: This order is executed immediately at the best available market price, ensuring a quick exit from the position.

b) Limit Order: A limit order allows you to specify a specific price at which you want to close your position. The order will only be executed if the market price reaches the specified limit price.

Step 4: Confirm the Contract Closure

After placing the closing order, you will receive an order confirmation from BitMEX. The confirmation email will provide details such as the order price, contract quantity, and settlement method. It is important to review the confirmation carefully to ensure accuracy before proceeding.

Step 5: Receive or Pay the Settlement

Upon the successful execution of your closing order, you will either receive or pay the settlement amount as per the chosen settlement method. If you have a cash settlement, the difference between the contract price and the settlement price will be credited or debited to your account in BTC. In case of physical settlement, you will receive or deliver the underlying cryptocurrency to or from your wallet.

Navigating Contract Closure with Leverage

Leverage is a powerful tool that can amplify both profits and losses. However, it is crucial to approach leverage with caution and understand its impact on the contract closing process.

• Increased Margin Requirements: Using leverage increases your margin requirements, which means you may need to post additional collateral to maintain your position. Failure to meet margin requirements can result in a forced liquidation of your position.
• Margin Call: When your account equity falls below a certain threshold due to unfavorable price movements, BitMEX may issue a margin call, requiring you to deposit additional funds to maintain your position. If you cannot meet the margin call, your position will be liquidated.
• Liquidation Cascade: In extreme market conditions, a leveraged position can be liquidated, leading to further liquidations in a cascading effect known as a liquidation cascade. Traders should be aware of this risk and manage their positions accordingly.

By following these steps, traders can effectively close their BitMEX contracts and navigate the challenges associated with contract closure, including the complexities of leverage.