What Is a Multi-Leg Options Order?
A multi-leg options order is an order to concurrently buy and sell options with multiple strike price, expiration date, or sensitivity to the underlying asset’s price. Principally, a multi-leg options order refers to any trade that involves two or more options that’s accomplished without delay. Since the order includes a mixture of various contracts, it differs from legging into or out of a multi-leg strategy one after the other.
Multi-leg options orders, reminiscent of spreads and butterflies, are sometimes used to capture profits when pricing volatility is predicted however the direction and/or timing is unclear.
Key Takeaways
- Multi-leg options orders allow traders to perform a posh options strategy that involves several different options contracts with a single order.
- Multi-leg options orders save traders time and frequently money, as well.
- Traders will often use multi-leg orders for complex trades where there is larger uncertainty within the trend direction.
Understanding Multi-Leg Options Orders
A multi-leg options order is used to enter complex strategies without delay, as an alternative of placing individual orders for every option involved. The sort of order is primarily utilized in multi-legged strategies reminiscent of a straddle, strangle, ratio spread, and butterfly. The commissions owed and margin requirements are typically less with some brokers when a multi-leg trade is executed as a unit quite than via several individual orders.
Multi-leg options orders are common now, especially with the appearance of automated electronic trading platforms. Before their widespread adoption, a trader would have needed to create individual tickets for every leg of the trade after which submit each of them to the market.
A multi-leg option order submits each legs of the trade concurrently, making execution much smoother for the choices trader. Furthermore, having each orders go in at the identical time removes among the latency risk and time lag of entering multiple option positions manually.
Examples of Multi-Leg Options Orders
Multi-leg options orders are more advanced than simply entering a put or a call on a stock you’re making a directional bet on.
A standard multi-leg options order is a straddle where a trader buys each a put and a call at or near the present price. The straddle has two legs: the long call option and the long put option. This multi-leg order simply needs the underlying asset to see enough price movement to create a profit—the direction of that price movement is irrelevant so long as the magnitude is there.
A more nuanced multi-leg options order is a strangle where there’s a direction favored by the trade, together with less protection against the alternative move. Depending on the trading platform, investors can state their trading idea and a multi-leg order can be suggested to capitalize on that concept.
Multi-Leg Options Orders and Trade Cost Savings
A multi-leg option order may make it easier to plan for the associated fee of the trade’s bid-ask spread costs. For instance, one multi-leg order will be used to purchase a call option with a strike price of $35, and a put option with a strike price of $35 and the identical expiration date as the decision to construct a straddle strategy.
Assume that the prices of the trade are a combined bid-ask spread of $0.07, and a commission of $7.00 plus $.50 per contract, for a complete of $8.07. Contrast the multi-leg order with entering the trade for a similar call and put in separate orders, each of which has a bid-ask spread of $0.05 and a $7.00 plus $0.50 per-contract commission, for a complete of $15.10.