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Effective leverage

Total notional exposure divided by account equity: the leverage you are actually using, which is usually far below the maximum the broker allows.

Headline leverage counts notional. Effective leverage counts sensitivity, which is what hurts. A hedged pair of positions can show 6:1 notional and behave like 1:1; a portfolio of five correlated momentum names can show 2:1 and behave like 5:1.

The practical estimate is empirical: regress your daily equity change against the index return, or simply compare your worst day to the market's worst day. If the market fell 2% and your account fell 6%, your effective leverage to that factor is about 3, whatever the statements say.

This is why beta-weighted-delta and portfolio-volatility exist. Both are attempts to state one number for "how much do I move when the world moves", which is the only leverage figure worth managing.

Related: leverage-ratio, beta-weighted-delta, gross-exposure

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Margin and leverageA small deposit controlling a much larger position, and the point at which losses trigger a margin call.Position you controlnotional value $100,000your margin deposit: $5,000$100,000 / $5,000 = 20:1 leverageYour deposit absorbs every dollar of loss$5,000$2,500$0Equity leftMARGIN CALLequity has fallen to $2,5000%1%2%2.5%3%4%5%How far the price moves against you
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
How a call option's delta changes with the underlying priceAn S-shaped curve rising from zero, passing through about a half at the strike, and flattening near one.Delta of a call option1.000.5008090110120Out of the moneyAt the moneyIn the money1.00 means it moves one-for-one with the stockdelta ≈ 0.50 at the strikeStrike 100Underlying price
Delta across the range of prices. Delta says how much a call's price moves for a one-point move in the stock. Far below the strike it is near 0 and the option barely reacts; at the strike it is about 0.50; far above it approaches 1 and tracks the stock.

Educational only, not advice. Spotted an error? Post in Site Feedback.