Source-free domain adaptation (SFDA) involves adapting a model originally trained using a labeled dataset ({\em source domain}) to perform effectively on an unlabeled dataset ({\em target domain}) without relying on any source data during adaptation. This adaptation is especially crucial when significant disparities in data distributions exist between the two domains and when there are privacy concerns regarding the source model's training data. The absence of access to source data during adaptation makes it challenging to analytically estimate the domain gap. To tackle this issue, various techniques have been proposed, such as unsupervised clustering, contrastive learning, and continual learning. In this paper, we first conduct an extensive theoretical analysis of SFDA based on contrastive learning, primarily because it has demonstrated superior performance compared to other techniques. Motivated by the obtained insights, we then introduce a straightforward yet highly effective latent augmentation method tailored for contrastive SFDA. This augmentation method leverages the dispersion of latent features within the neighborhood of the query sample, guided by the source pre-trained model, to enhance the informativeness of positive keys. Our approach, based on a single InfoNCE-based contrastive loss, outperforms state-of-the-art SFDA methods on widely recognized benchmark datasets.