How Does Leverage Magnify the Risk of Volatility in Derivatives Trading?

Leverage allows a trader to control a large position with a relatively small amount of capital (margin). When volatility causes an adverse price movement, the losses are calculated on the full position size, not just the margin.

This means a small percentage change in the underlying asset's price can wipe out the entire margin quickly. High leverage accelerates the path to a margin call and forced liquidation.

It increases both potential returns and potential losses exponentially.