The pros & cons of leverage in options

Options leverage is a core concept of options trading. For a given  capital outlay, investing in options will increase your potential  returns compared with investing in the underlying stock.

What Is Leverage?

Leverage applies to a variety of different financial products. The leverage example most familiar to people is the purchase of a home.

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How Leverage Works in Options Trading

No matter which strategies for trading options you use, you may increase the leverage of your investment by using options.

Calculating Leverage

The options leverage example above presents the options price movement  from $5 to $15 without explaining what drove the price change.

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The Takeaway

Options can be a way to increase your returns, but with those higher potential returns comes higher potential risk.


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