Which of These Has More Leverage? Futures, Forex or Options?
Trading in the Forex has a margin requirement of 1% (or 100x leverage), making it more leveraged than futures at margin between 5-20% (5-20x leverage) – note futures margining and rules are complex and won’t be covered in detail in this answer.
Finally, options have a margin requirement of 100% the cost of the premium (for a purchase), however, 1 contract controls 100 shares of the underlying stock. This completely depends on the premium paid. Therefore, the leverage provided by options can be the greatest, but is also based on a wide set of rules.
Leveraging is important in that it gives you a lot of control of a position with a small outlay of capital. It is important to understanding that with leveraging also comes risk. Let’s take the example that we shorted an options contract vs. the classic example of buying an options contract. If you are on the wrong side of the market in a leveraged position and the market moves in an opposite direction, you run the risk of losing not only the premium received (in the case of a written or sold position) but the cost of purchasing the underlying asset in the market and delivering it at a loss.
Using Leverage to Your Advantage
The advantages that leveraging brings must be weighted against the cost of borrowing. If you borrow money (margin) to purchase shares of stock then in order to break even, the value of the stock must rise to a level that at the very least covers that cost.
Using options as a contrary example, say you sell 1 put contract with an exercise price of 25 for a premium of $5. The margin requirement would change daily, but for Reg T margin and assuming that the stock stays at the current level or appreciates you have a margin requirement of 20% which equates to 5x leverage without any cost of borrowing.
If the price of the stock begins to fall, you face the risk of being exercised against (the owner of the option exercises their right to sell you the underlying shares). In order to break even, the price of the underlying stock can’ fall below $20. This is simple to see - if exercised, you will be forced to purchase the stock at $25 per share ($2,500) that is now only worth $20 a share or $2,000. But since you already received the $500 in premiums, you have have ameliorated the $500 difference between the purchase price and its market value.
So the question may not be how much more leveraging can you achieve between Forex, Futures, and Options but how to responsibly use this available leverage as part of your overall investment strategy.