Leg in Trading - Meaning, Definition With Examples

A leg is a single position taken in trading. Say if you buy 100 shares of a company then that's your 1st leg. Now when you sell the shares later it is your 2nd leg. In advanced trading strategies, in Futures and Options, multi-leg orders are used. In such orders, 2, 3, and 4 legs are executed as part of a single strategy.

First Leg in Trading (1st leg)

1st leg in trading means taking a single position, either Buy or Sell, of an instrument.

1 Leg Trading Examples (Single-leg)

• Long Call

  A Long Call is one of the basic options trading strategy. In this strategy, a single position of buying a Call Options contract is taken. This position is suitable for a trader who is bullish and expects the market to rise. Read more on Long Call Options Strategy.

• Short Call

  A Short Call strategy involves the selling of the Call Options contract. In this strategy, a trader is very Bearish in his market view and expects the price of the underlying asset to go down in the near future. Read more on Short Call Options Strategy.

• Long Put

  This strategy is opposite to the Long Call strategy discussed above. It involves buying a Put Options contract and is used in bearish market conditions. Read more on Long Put Options Strategy here.

• Short Put

  A short put is a bullish trading strategy and involves a single-leg position of selling a Put Options contract. Read more on Short Put Options Strategy here.

Second Leg in Trading (2nd leg)

2nd leg in trading means taking 2 positions, either Buy-Buy, Buy-Sell, Sell-Buy or Sell-Sell, of an instrument.

2 leg Trading Examples

• Long Straddle

  A long straddle is a good two-leg trading example. It involves buying call and a put option contracts of the same underlying asset, at the same strike price and of the same expire date. The strategy is used in highly volatile market conditions. Read more on Long Straddle Options Strategy here.

• Short Straddle

  It is another good two-leg trading example. The trading involves selling call and a put option contracts of the same underlying asset, at the same strike price and of the same expire date. The strategy is used in no or low volatile market conditions. Read more on Short Straddle Options Strategy here.

Multi-leg Order Trading

Multi-leg orders are used in executing complex strategies in Futures and Options trading. Multi-leg orders are complex as they involve taking multiple positions and are used by experienced traders.

Multi-leg order Definition and Example

A multi-leg order is a combination of buy and sell orders. Let's understand it by taking an example of Options contracts. Fundamentally, there are only 4 types of orders:

• Buy Call Option Order
• Sell Call Option Order
• Buy Put Option Order
• Sell Put Option Order

In a multi-leg order, you use a combination of these orders. In all these strategies you take more than 2 positions in the market.

Multi-leg orders are used to:

• Minimize risks as higher risk in one trade is negated by lower risk in other trade.
• Minimize losses as losses in one trade are negated by gains in other trade.
• As a hedging tool.
• To optimize profits from a given market situation.

Multi-leg Order Examples

Butterfly and Condor are some of the examples of a multi-leg order.

• Long Call Butterfly

  It is a neutral trading strategy and used when very low volatility in the price of underlying is expected. It is a combination of bull Spread and bear Spread. It involves Buying 1 ITM Call, Selling 2 ATM Calls and Buying 1 OTM Call. The strike prices of all the contracts should be at an equal distance from the current price.

  For example, let's assume that the Nifty is currently trading at 11400. You expect very little volatility in it and wish to execute a Long Call Butterfly strategy. You buy 1 ITM Call Option at 11300, sell 2 ATM Nifty Call Options at 11400, buy 1 OTM Call Option at 11500.

  Learn Long Call Butterfly strategy in detail.

• Long Condor

  It is a 4 leg trading strategy that involves buying 2 ITM and 2 OTM Call Options contract at different strike prices but with the same expiry date. The strategy is similar to a long butterfly strategy.

  For example, let's assume that a stock is trading at Rs 45 (spot price) in June with a lot size of 100 shares in 1 lot. You can execute a long condor strategy by buying Call Options contracts at 35 and 55 and selling Call Options contracts at 40 and 50.

Answered on 2019-11-10