Leg

What is a Leg?

A leg is considered as the component of a derivatives Trading Strategy wherein a trader accumulates several options and futures contracts, or in rare situations, both of them to hedge a certain position, profit from a spread or arbitrage.

In these strategies, every derivative position or contract in the Underlying security is known as a leg. Not just that but cash flows that are exchanged in a swap are also called legs.

Understanding a Leg

In simple words, a leg is one side or one part of a multistep trade. Such types of trades are similar to a long journey race where there are multiple legs or parts. They get used in place of individual trades, more so when trades need complex strategies.

In a way, a leg may comprise the synchronized sale and purchase of a security. To legs, there are several facets, some of which have been jotted down below:

Leg Options

Options are considered as the derivative contracts that provide the right, but not the Obligation to traders to purchase or sell the Underlying Security for a predetermined price, known as the strike price – before or on a specific expiration date.

While making a purchase, this trade initiates a Call Option, and while selling, it initiates a Put Option. The simple options strategies are the single-legged ones that include merely one contract.

Two-Leg Strategy: Long Straddle

This one is the example of an options strategy that is made of two legs, a long put and a long Call. This strategy is ideal for those traders who are aware of the fact that the price of a security will change but are not confident as far as the directional movement is concerned.

Three-Leg Strategy: Collar

This one is a protective strategy that is used on a long stock position. It is made up of three legs, such as a short call, a long put and a long position in the underlying security. This combination turns to a bet that the price of the Underlying Asset will increase, but it is hedged by the long put that eradicates the loss potential. Individually, this combination is called the protective put.

Four-Leg Strategy: Iron Condor

This one is a limited risk, complex strategy, but its objective is quite simple: to make cash on a bet that the price of the underlying asset will not move a lot. Generally, the underlying price, at the time of expiry, gets to be between the strike prices of the short call and the short put.