$TROY When spot prices rise, they can "liquidate" futures positions due to the margin calls and price convergence between the two markets.
Here’s how it works:
1. Price Convergence: As the futures contract approaches expiration, its price tends to converge with the spot price of the underlying asset. If the spot price rises sharply, futures traders who are short (betting prices will fall) may face losses.
2. Margin Calls: Futures contracts require traders to maintain a margin (a deposit) to cover potential losses. If the spot price rises unexpectedly, traders with short futures positions may not have enough margin, triggering a margin call, forcing them to liquidate (sell) their positions.
3. Liquidation: To cover these margin calls or stop further losses, traders may be forced to buy back the futures contracts at a higher price, which can push futures prices even closer to the rising spot price.
This dynamic helps ensure that futures prices reflect the actual market conditions and that positions are closed when necessary, balancing both spot and futures markets.
HODL
