Understanding different types of leverage

[Aston01]

Leverage seems to be a bit of a catch all term for a variety of different methods of financial gearing.

1.) Derivatives for example have inherent leverage just due their nature of being representative unit of something larger (i.e. 1 stock option contract = 100 shares)

2.) Margin is lending leverage where you're fronted additional capital relative to what you're putting up.

Both would fall under the umbrella term of leverage, but they represent different placement of gearing in a financial equation which inherently effects the outcomes.

I am trying to understand more about the topic and was wondering if there are other forms I am missing that apply to trading? Is there better terminology used to describe the different types of gearing?

 

[cdcaveman]

Debt is leverage..

 

[tommcginnis]

Derivatives typically are 100:1.
Margin at 4:1.
Tax structures involve leverage of t:1 where, if you make an investment of a dollar, then you can lever t back to you.

(Like the old joke,.....
"OMG!!! Look at these credit card bills!!!"
'But Honey!!! Look how much I saved!' )

 

[Aston01]

Is there any instrument with a (non-margin) higher leverage ratio then the 100:1 with derivatives?

 

[tommcginnis]

Is there any instrument with a (non-margin) higher leverage ratio then the 100:1 with derivatives?

Lots. I think NG is 1000:1? I fergit.

 

[Aston01]

Lots. I think NG is 1000:1? I fergit.

What is NG?

 

[Overnight]

Lots. I think NG is 1000:1? I fergit.

That seems correct. It's 10 billion btu per contract, at 0.001USD per 1,000,000 btu price fluctuation (tick).

So $10 per tick would be $0.001 per each million btu, at 10,000,000,000 btu per contract. That works out to 1000:1 leverage

 

[Overnight]

What is NG?

Natural Gas on NYMEX.

 

[DeltaRisk]

Leverage seems to be a bit of a catch all term for a variety of different methods of financial gearing.

1.) Derivatives for example have inherent leverage just due their nature of being representative unit of something larger (i.e. 1 stock option contract = 100 shares)

2.) Margin is lending leverage where you're fronted additional capital relative to what you're putting up.

Both would fall under the umbrella term of leverage, but they represent different placement of gearing in a financial equation which inherently effects the outcomes.

I am trying to understand more about the topic and was wondering if there are other forms I am missing that apply to trading? Is there better terminology used to describe the different types of gearing?

You only understand retail leverage.
PM is risk leverage granted by your broker and the exchange. It isn't really leverage though, it's more risk capital.

Haircut "leverage," is granted by the exchanges. You deal directly with a clearing firm. A broker, or clearing firm cannot change your haircut. Only the exchange can. That is an edge. You don't have to worry about margin calls anymore.
*wink wink*

 

[JackRab]

Haircut "leverage," is granted by the exchanges. You deal directly with a clearing firm. A broker, or clearing firm cannot change your haircut. Only the exchange can. That is an edge. You don't have to worry about margin calls anymore.
*wink wink*

Unless your risk blows out and you either need to deposit $ or reduce risk, forced by your clearing... not perse a margin call... but quite similar.