Explain the Term “Leverage” in the Context of Derivatives Trading.
Leverage allows a trader to control a large notional position in an asset with a relatively small amount of capital (margin). It magnifies both potential gains and potential losses.
In derivatives like futures and perpetual swaps, leverage is common and is expressed as a ratio (e.g. 10x).
While it increases capital efficiency, it significantly raises the risk of liquidation.
Glossar
Leverage
Amplification ⎊ Leverage, within cryptocurrency, options, and derivatives, represents the utilization of borrowed capital to increase the potential return of an investment, fundamentally altering risk-reward profiles.
Notional Position
Position ⎊ The notional position represents the total face value of a derivative contract, calculated by multiplying the contract size by the current market price of the underlying asset, irrespective of the actual capital outlay.
Gains
Realization ⎊ Gains, within cryptocurrency, options, and derivatives, represent the quantified difference between the initial outlay and the subsequent value received upon the closure or liquidation of a position; this is fundamentally a measure of profit, net of associated costs, and is critical for performance attribution.
Liquidation
Trigger ⎊ Liquidation in cryptocurrency derivatives represents the forced closure of a trading position due to insufficient margin to cover accruing losses, a critical event impacting market stability.