Leg

What Is a Leg?

A leg is one piece of a multi-part trade, frequently a derivatives trading strategy, in which a trader joins multiple options or futures contracts, or — in rarer cases — combinations of the two types of contract, to hedge a position, to benefit from arbitrage, or to profit from a spread extending or tightening. Inside these strategies, every derivative contract or position in the underlying security is called a leg.

While going into a multi-leg position, it is known as "legging-in" to the trade. Leaving such a position, in the mean time, is called "legging-out". Note that the cash flows exchanged in a swap contract may likewise be alluded to as legs.

Figuring out a Leg

A leg is one part or one side of a multi-step or multi-leg trade. These sorts of trades are just similar to a race of a long excursion they have multiple parts or legs. They are utilized in place of individual trades, particularly when the trades require more complex strategies. A leg can incorporate the simultaneous purchase and sale of a security.

For legs to work, taking into account timing is important. The legs ought to be practiced simultaneously to stay away from any risks associated with changes in the price of the connected security. All in all, a purchase and a sale ought to be made around a similar opportunity to keep away from any price risk.

There are multiple types of legs, which are framed below.

Legging Options

Options are derivative contracts that give traders the right, yet not the obligation, to buy or sell the underlying security for a settled upon price — otherwise called the strike price — at the very latest a certain expiration date. While making a purchase, a trader starts a call option. While selling, it's a put option.

The simplest option strategies are single-legged and include one contract. These come in four fundamental forms:

By joining these options with one another and additionally with short or long positions in the underlying securities, traders can develop complex wagers on future price developments, leverage their possible gains, limit their expected losses, and even bring in free money through arbitrage — the practice of benefiting from rare market failures.

Two-Leg Strategy: Long Straddle

The long straddle is an illustration of an options strategy made out of two legs: a long call and a long put. This strategy is really great for traders who realize a security's price will change yet aren't sure of what direction it will move.

The investor breaks even assuming the price goes up by their net debit — the price they paid for the two contracts plus commission expenses — or diminishes by their net debit, profits on the off chance that it moves further in one or the other bearing, or, in all likelihood loses money. This loss, however, is limited to the investor's net debit.

As the chart below shows, the combination of these two contracts returns a profit whether or not the underlying security's price rises or falls.

Three-Leg Strategy: Collar

The collar is a protective strategy utilized on a long stock position. It involves three legs:

• A long position in the underlying security
• A long put
• A short call

This combination adds up to a bet that the underlying price will go up, however it's hedged by the long put, which limits the potential for loss. This combination alone is known as a protective put. By adding a short call, the investor has limited their expected profit. Then again, the money the investor gets from selling the call counterbalances the price of the put, and could even have surpassed it, hence, bringing down the net debit.

This strategy is normally utilized by traders who are marginally bullish and don't anticipate large expansions in price.

Four-Leg Strategy: Iron Condor

The iron condor is a complex, limited risk strategy yet its goal is simple: to make a bit of cash on a bet that the underlying price won't move definitely. Preferably, the underlying price at expiration will be between the strike prices of the short put and the short call. Profits are capped at the net credit the investor gets subsequent to buying and selling the contracts, however the maximum loss is additionally limited.

Building this strategy requires four legs or steps. You buy a put, sell a put, buy a call and sell a call at the relative strike prices displayed below. The expiration dates ought to be close to one another, if not indistinguishable, and the ideal scenario is that each contract will lapse out of the money (OTM) — that is, worthless.

Futures Legs

Futures contracts can likewise be combined, with each contract comprising a leg of a larger strategy. These strategies incorporate calendar spreads, where a trader sells a futures contract with one delivery date and buys a contract for a similar commodity with an alternate delivery date. Buying a contract that terminates relatively soon and shorting a later (or "conceded") contract is bullish, as well as the other way around.

Different strategies endeavor to profit from the spread between various commodity prices, for example, the crack spread — the difference among oil and its results — or the spark spread — the difference between the price of natural gas and power from gas-terminated plants.

Features

• Traders use multi-leg orders for complex trades where there is less confidence in the trend bearing.
• A trader will "leg-into" a strategy to hedge a position, benefit from arbitrage, or profit from a spread.
• A leg alludes to one part of a multi-step or multi-part trade, like in a spread strategy.