What Is the Primary Risk When Trading a Derivative Contract?

The primary risk when trading derivatives, especially leveraged ones, is market risk combined with the risk of liquidation. Due to leverage, a small adverse price movement in the underlying asset can lead to a significant loss, potentially wiping out the entire margin collateral.

This magnified risk of loss, which can exceed the initial investment in extreme cases, is the core danger. Counterparty risk is also a factor in over-the-counter derivatives.