Understanding Leverage

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Lesson /23
Leverage Sample Lesson
  • You will learn how empty the concept of "percentage return" can be and the relationship of high percentage return investments and exposure.
  • You will see an example of portfolio-level overleverage based on the example of position leverage in the last lesson.
  • You will see an example of the risk that an investor takes by trying to squeeze dollar returns out of percentage returns.
  • You will see an example of the destructive cycle of an investor trying to lever his or her way out of losses caused by overleverage.

Leverage is one of the most important topics in investing. Full stop. For an investor using options in their portfolio, understanding what leverage is and how to measure and manage it is a necessity. Even investors who choose not to use leverage are affected by others that do, in the same way that anyone driving a car on New Years is affected by drunk drivers.

The course…

  • teaches you characteristics of the three types of leverage: operating, financial, and investing
  • delves into the mechanics of investment leverage and overleverage,
  • shows you how leverage applies to option selling strategies and how those dynamics led to the downfall of AIG,
  • teaches you how to conceive of leverage when buying options at different moneyness levels,
  • introduces a framework for measuring and managing leverage as a directional investor,
  • covers other measures of leverage like Lambda and shows how levered and inverse ETFs generate returns, and
  • shows why a significant portion of Warren Buffett’s investing success stems from his use of leverage.

The snippet from the video you see above is from the lesson “Overleverage” and offers an unforgettable view of how leverage works in good times and in bad.

Our goal in this course is to offer you a thorough and rigorous understanding of leverage and show you how to measure and manage leverage in a directional, long time-horizon portfolio. You owe it to yourself and your portfolio to take this course.

Supplemental Resources