Foundations · Ch. 04
Leverage and Margin
You put down $100 and control $2,000 of a position. The market ticks up 5%, and you’re up 100%. It ticks down 5%, and there’s nothing left. Leverage doesn’t change the market. It changes what the market does to you.
The Idea
Intuition
Leverage is borrowed size. You post a little of your own money, your margin (also called collateral), and use it to control a much bigger position. At 20×, $100 of yours drives $2,000 of exposure.
Here’s the catch. The gains and losses of the whole position land on your small pile of collateral. That makes leverage a multiplier on every move. A 5% price change isn’t a 5% change to you. It’s 5% times your leverage. Wonderful on the way up, brutal on the way down.
There’s also a floor under it. Your losses can only ever eat what you put in. The moment they would wipe out your collateral, the position gets closed for you. That’s a liquidation, and it arrives sooner the higher you crank the leverage. A 20× long has just 5% of room to be wrong. Move the sliders and watch how fast that cushion disappears.
The Math
How It’s Calculated
In plain terms: your return is simply the price move times your leverage, and you’re wiped out the moment that loss equals your whole collateral.
Your return on collateral scales the price move by your leverage :
You’re wiped out when that return hits −100%, meaning the price has moved against you by one over your leverage:
So a 10× position has 10% of room, and a 25× position has just 4%. Higher leverage buys you size, and it spends your margin of safety to do it. (That threshold is the liquidation price, which we get up close in Chapter 8.)
Where this goes
That’s the whole toolkit: a price, the depth behind it, direction and PnL, and leverage to amplify all of it. Put them together and you get a perpetual future, a bet exactly like these that simply never expires. Actually assembling one, with funding, mark price, and liquidations, is Part II. Back to contents →