Leg (in trading)

What is a leg?

A leg is a single component of a multi-part trade, typically in derivatives such as options or futures. Multi-leg strategies combine two or more legs to hedge risk, pursue arbitrage, or express a directed or non-directional view on price movement. Entering or exiting the individual components of such a strategy is commonly called “legging-in” or “legging-out.”

Key takeaways

• A leg is one contract or position within a multi-part derivatives strategy.
• Multi-leg strategies are used to hedge, speculate, or capture spread/arbitrage opportunities.
• Timing and coordination of legs matter—staggered execution can introduce price and execution risk.
• Examples include two-leg (long straddle), three-leg (collar), and four-leg (iron condor) options strategies.
• Futures legs are combined in spreads (e.g., calendar, crack, spark) to trade relative value between contracts.

Legs in options trading

Options give the right (not the obligation) to buy (call) or sell (put) an underlying at a strike price by expiration. Each options contract or related stock position forms a leg of a multi-part options strategy.

Single-legged strategies involve one contract (buy or sell a call/put). A commonly used single-leg variant is a cash-secured put—selling a put while holding enough cash to buy the underlying if assigned.

Common multi-leg options strategies:
* Two-leg — Long straddle
* Components: long call + long put at the same strike and expiration.
* Use case: expecting a large move in price but uncertain about direction.
* Payoff: profitable if price moves sufficiently up or down beyond the combined premium paid; loss limited to the premium.
* Three-leg — Collar
* Components: long underlying (or long stock), long put (protection), short call (income).
* Use case: moderately bullish owner seeking downside protection while financing some protection cost by capping upside.
* Payoff: downside limited by the put; upside potential reduced by the short call.
* Four-leg — Iron condor
* Components: sell an OTM put and an OTM call, buy a further OTM put and call (forming two credit spreads).
* Use case: expecting low volatility and that price will remain within a range until expiration.
* Payoff: limited profit (net credit received) if all options expire OTM; losses are limited but can occur if price moves beyond the wings.

When building option legs, align expirations and consider strike spacing, implied volatility, liquidity, commissions, margin, and the impact of time decay.

Legs in futures trading

Each futures contract in a combined position is a leg. Futures legs are often used to trade relative value across delivery dates or related commodities.

Examples:
* Calendar spread
* Sell a near- or far-dated futures contract and buy the opposite-dated contract for the same underlying.
* Buying near and selling deferred typically expresses a bullish view on the near-term relative to the deferred market; the reverse expresses a bearish view.
* Crack spread
* Trades the price relationship between crude oil and its refined products (e.g., gasoline, diesel) to capture refining margins.
* Spark spread
* Trades the difference between natural gas cost and electricity price to capture generation margins for gas-fired plants.

Execution and risk management

• Timing: Execute legs together when possible to minimize price movement risk. Staggered execution (legging) can lead to unwanted exposure.
• Liquidity and slippage: Use liquid strikes and expirations to reduce execution cost and slippage.
• Transaction costs and margin: Multiple legs increase commissions and margin requirements—factor these into breakeven calculations.
• Volatility and Greeks: Implied volatility, theta (time decay), delta, and other Greeks affect multi-leg performance.
• Practice and planning: Define the trade objective, maximum loss, and exit rules before entering multi-leg strategies; consider paper trading for complex structures.

Bottom line

A leg is a fundamental unit of multi-part derivative strategies. Combining legs—whether options or futures—lets traders construct nuanced exposures (hedges, directional bets, or range plays). Successful use of multi-leg strategies depends on careful planning, coordinated execution, and disciplined risk management.