We recommend reading this chapter on Varsity to learn more and understand the concepts in-depth.
Key takeaways from this chapter
- Leverage plays a key role in futures trading.
- Margins allow us to deposit a small amount of money and take exposure to a large value transaction.
- Margins charged is usually a % of the contract value.
- Spot market transactions are not leveraged; we can transact to the extent of our capital.
- Under leverage, a small change in the underlying results in a massive impact on the P&L.
- The profits made by the buyer is equivalent to the loss made by the seller and vice versa.
- The higher the leverage, the higher is the risk and, therefore, the higher the chance of making money.
- Futures Instrument simply allows one to transfer money from one pocket to another. Hence it is called a “Zero Sum Game.”
- The payoff structure of a futures instrument is linear.