FAQ: Can I get liquidated with a delta-neutral (long and short) leveraged position?

I’m posting this here because this topic came up in the Telegram chat this morning, and I thought it was an interesting and fair question. I intuitively thought it was definitely possible (after all, exchanges benefit greatly from liquidations, so there is no way they will let you off the hook in any scenario). However, I was unfamiliar with the technicalities, so I did some research and am posting the findings here as I know some of you guys like to use hedging bots.

Take note that leverage and complexity multiplies those risks. And by complexity, I mean the use of different exchanges, different markets (spot, futures, DeFi), and different assets.

  • Funding rate misaligment: This is the main risk. If the funding rate for your long position is consistently higher than your short, these costs can add up over time, eroding your margin and potentially leading to liquidation if not carefully managed.
  • Execution risk: Your average price on your long and short needs to be exactly the same, which can be difficult to accomplish with market orders. This is increasingly complicated if you are using delta-neutral strategies involving DeFi with different assets and would require a program to properly manage these positions.
  • Volatility Spikes: Extreme volatility can lead to a temporary misalignment in the relationship between your long and short positions, especially if they are not on the exact same asset or if they are in different exchanges.

There are some bots available to farm funding fee rates. It would be interesting to know if any of you have experience with this and what were the results.

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I have monitored prices through websocket in the past so that I open position on whichever side pays 10 secs before funding fee settlement and closing 10 secs later but price always seems to move in such a way in those 10-20 seconds that the gains of funding fees are lost.
So I gave up

Yes for sure is not that easy, if it was everyone would be doing it. Just another bot with it’s own risks.