Module 2 of 5 in Derivatives and advanced market concepts
Leverage, short selling and risk
Leverage and margin, short selling, liquidity and slippage, the different risks of option buyers and sellers, and expiry, gap and settlement risks.
5 lessons in this module. Progress is saved in your browser as you go.
This module is about how derivative positions lose money: leverage, gaps, illiquid contracts, expiry-day behaviour and settlement. It also compares the very different risk profiles of option buyers and option sellers.
By the end of this module you should be able to
- Calculate how leverage magnifies returns and losses on capital.
- Explain how short selling works and why its losses are not capped.
- Explain liquidity, slippage and gap risk in derivative markets.
- Compare the risk profiles of option buyers and option sellers, including expiry and settlement risks.
Lessons in order
Module test
10 questions, chosen at random from a bank of 30 questions and balanced across this module's learning goals and difficulty levels. Every question comes with an explanation. You need 80% to pass, and you can retake it as often as you like with a fresh set of questions.
This module builds on
- What derivatives are: Derivatives are the most common source of leverage for individuals.
- Percentages, percentage change and percentage points: The calculations here are percentage changes on exposure and capital.
- Strike prices, premiums and expiry: Liquidity differs greatly across the strikes and expiries explained there.
- Bid, ask, spread and liquidity: This lesson applies the spread and liquidity ideas from that lesson to derivatives.
- Option payoff diagrams and breakevens: The risks follow from the payoff shapes explained there.
- Price gaps: Gap risk builds on the gaps explained there.