What Is the Primary Risk Associated with Leverage in Options Trading?
Leverage allows traders to control a large position with a small amount of capital. The primary risk is the potential for amplified losses.
If the market moves against the leveraged position, losses can quickly exceed the initial capital invested, leading to margin calls or even complete account wipeout. This magnification of risk requires strict risk management.
Glossar
Margin Calls
Trigger ⎊ Margin calls represent a demand from a brokerage or exchange for an investor to deposit additional funds or collateral to bring the account back to the required maintenance margin level, particularly relevant in leveraged cryptocurrency trading and derivatives markets.
Arbitrage Trading
Exploitation ⎊ The core of arbitrage trading within cryptocurrency, options, and derivatives involves identifying and profiting from temporary price discrepancies across different markets or exchanges.
Large Position
Exposure ⎊ A large position, within cryptocurrency derivatives, signifies substantial capital allocation relative to prevailing market liquidity, potentially influencing price discovery and increasing systemic risk.
Risk Associated with Leverage
Risk ⎊ The risk associated with leverage in cryptocurrency, options trading, and financial derivatives refers to the amplified potential for both gains and losses that arises from using borrowed capital to increase investment exposure.
Underlying Asset
Futures Pricing incorporates the cost of carry, which in crypto markets includes funding rates derived from perpetual swap markets and the time value associated with holding the spot asset.