Leverage is a Double-Edged Sword

We use proprietary futures brokerage data with intraday time stamps to analyze how embedded derivatives leverage affects trading and performance in the cross-section of investors. The effect is heterogeneous: Skilled investors benefit from leverage, while leverage has the opposite impact on the unskilled. Institutional performance does not depend on leverage. Across all individuals and institutions, leverage negatively impacts performance, mostly from forced liquidations. Unskilled investors' levered positions amplify losses stemming from gambling proclivity. Leverage facilitates {\it de facto} liquidity provision by the skilled; these investors earn 19.3bps per leverage unit. Regulatory constraints on leverage decrease (enhance) skilled (unskilled) investors' performance