Derivative Trading Leverage

Leverage in derivative trading is the practice of controlling a large position with a small amount of capital, amplifying both gains and losses. You might deposit $10,000 (margin) to control $100,000 of futures or options (10x leverage). If the market moves 1% in your favor, you gain $1,000 (10% return on capital). If it moves 1% against you, you lose $1,000 (10% loss on capital). Leverage is enabled through margin accounts with brokers, futures contracts, options, and other derivatives. It's a double-edged sword: powerful amplification of returns, but catastrophic risk if misjudged.