Explain the Concept of “Leverage” as Applied to Trading Financial Derivatives

Leverage in derivatives trading allows a trader to control a large notional value of an underlying asset with a relatively small amount of capital (the premium or margin). Because the option's price (premium) is much lower than the underlying asset's price, small price movements in the underlying asset can result in a much larger percentage return or loss on the option premium.

This magnifies both potential profits and risks.