What is Leverage
Meta Pro Trader Options Education series.
The use of various financial instruments (option or futures contracts) to increase the rate of return from an investment.
Leverage can amplify the potential gain from an investment by initiating a relatively small amount of money for the right to potentially capitalize on a much larger amount of capital or product.
These types of financial instruments however, carry a higher degree of risk.
Leverage can be provided to individual investors by purchasing option contracts. Purchasing option contracts can provide investors unlimited profit potential with a risk limited to the total amount invested.
For an example:
An individual has US$10,000 to invest and wants to speculate on the perception of higher Gold prices to come, therefore you could purchase 10 call option contracts and have the right to capitalize on a leverage amount of 1,000 troy ounces of Gold. In other words each contract that is purchased has a leverage of 100 troy ounces of Gold, therefore a relatively small price gain on Gold futures could potentially amplify an investors return.