Stock options trading – A 50% gain or decline in company net earnings becomes a 50% gain or decline in per share earnings on common stock.

Assume, however, a different (and leveraged capitalization, with $1,000,000 in 5% bonds ahead of the 100,000 shares of common stock. Now the $100,000 in earnings are used thus: $50,000 goes to bond interest leaving $50,000 (50¢ a share) for the common. Suppose business improves and available annual earnings rise to $150,000. Then $50,000 is still needed for bond interest, but the balance, namely $100,000, doubles the per share earnings on common stock from 500 to $1. This is leverage. A 50% rise in earnings results in a 100% rise in share earnings, and the leverage ratio is 2 to 1.

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