What Is the Role of ‘Leverage’ in Magnifying Both Gains and Losses in Derivatives Trading?

Leverage is the use of borrowed capital to increase the potential return of an investment. By requiring only a small margin deposit, leverage allows traders to control a much larger position.

This magnifies both gains and losses; a small price movement can result in a large percentage change in the equity of the leveraged position, which is why it contributes to market volatility.