notional S&P 500 investment. Equity options Shares also have a notional principal amount, but it is called nominal instead of notional. For example, if stock option contracts are being bought, those contracts could potentially give a lot more shares than would be possible to control by buying shares outright. So the notional value is the value of what is controlled, rather than the value of what is owned. For instance, if a 100 share equity call option is purchased with a strike of $60 for a stock that is currently trading at $60, then it has the same upside potential as holding $6,000 of stock (1 option × 100 multiplier × $60), but the shares may have been purchased for $5 each (for a total of $500). By this measure, a leverage of $6,000/$500 = 12x has been achieved. Note that if the stock price moves to $70, the dollar notional is now $7,000 (minus the cost of option and commission differential), but the quantity (unit notional) is still 1 contract. Foreign currency/exchange (FX derivatives) In FX derivatives, such as forwards or options, there are two notionals. For example, if an individual has a call option on USD/JPY currency struck at 110, and one of these is purchased, then this gives the buyer the option to pay 100 USD and receive 110 × 100 = 11,000 JPY, so the USD notional is 100 USD, and the JPY notional is 11,000 JPY. Note that the ratio of notionals is exactly the strike, and thus if the strike is moved, one of the notionals will change. For instance, if the strike is moved to 100, and the USD fixed at 100, the JPY notional becomes 10,000; the buyer will pay the same number of USD and receive fewer JPY. Alternatively, JPY currency could be held constant at 11,000 and change the USD notional to 110: hence, the buyer will pay more in USD and receive the same number of JPY. When hedging foreign currency exposure, such as for an American business in USD, an outflow of 11,000 JPY, the foreign currency notional must be fixed. ETFs Exchange-traded funds track underlying positions, so an investment performs equivalently to purchasing that number of physical positions, though the fund may in fact not directly purchase the positions, and instead use derivatives (especially futures) to produce the position. Levered ETFs, notably inverse exchange-traded funds, have the