When talking about option strategies, you often hear the term "leg" or "legs". This page explains what a leg means, providing examples of option strategies with one, two, three, and four legs.
What Is a Leg in Option Strategies
A leg is a single component of an option strategy – typically an option with a particular strike and expiration. An option strategy can be composed of one or more legs. It is best explained on an example.
Example: Iron Condor Legs
Iron condor is a popular option strategy with a higher number of legs – four. An iron condor position consists of four different options with same expiration date, but different strikes. The four legs are:
- Long put
- Short put with higher strike
- Short call with even higher strike
- Long call with highest strike
Examples of Strategies by Number of Legs
Most popular option strategies (those which have commonly known names) have up to four legs, although there are more complex strategies which may involve much higher number of legs.
Single Leg Option Strategies
The very basic strategies have only one leg – you buy a single option (long call, long put), or you sell a single option (short call, short put).
Option Strategies with Two Legs
There is a wide range of option strategies with two legs. Examples include vertical spreads (bull call spread, bear put spread, bear call spread, bull put spread), calendar spreads, or diagonal spreads. Spreads (not only in options) are generally positions which consist of two legs – one long and one short.
That said, there are other two-leg strategies where both legs are long (long straddle, long strangle) or both are short (short straddle, short strangle).
All legs don't need to have the same number of contracts. For instance, ratio spreads or backspreads involve two legs with different position sizes.
Moreover, a leg doesn't need to be an option. For example, covered call can also be considered a two-leg strategy: The first leg is the long underlying stock, the second leg is the short call option.
Option Strategies with Three Legs
Examples of option strategies with three legs include collar (long underlying, short call, long put) or ladders (for instance, bull call ladder consists of a long call and two short calls, each with different strike).
Another example of three-leg strategy is call butterfly. Although it consists of four options, two of them (the short middle strike calls) have the same strike and same expiration, and therefore can be considered a single leg. The three legs are:
- Long lower strike call
- Short middle strike call (double position size)
- Long higher strike call
Similarly, put butterfly is also a three-leg position. It is not a big mistake to treat the middle strike options as two legs. After all, dividing complex positions into legs is just a matter of terminology and management, and has no effect on the trade's total profit or loss, or Greeks, which are all additive across legs.
Option Strategies with Four Legs
Unlike call butterfly and put butterfly, iron butterfly has four legs, because the middle strike options are of different types (call and put).
Besides iron butterfly and iron condor, other four-leg strategies include call condor and put condor, or some synthetic strategies such as a box (short put and long call at lower strike, combined with short call and long put at higher strike).
Legs outside Options
As we have seen on the examples of covered call or collar, a leg doesn't need to be an option. Furthermore, the leg term is not limited to option strategies. It is commonly used in a wide variety of derivative strategies – generally any time when a position involves two or more different parts. Examples include futures spreads or swaps.
Legging into Option Positions
Another related term is "legging" into or out of an option position. It means executing individual legs separately, rather than all at the same time.
For example, when you expect a stock's price to rise and want to buy a bull call spread, you can buy the long call leg first and wait until the stock goes up, in order to sell the short call leg for a higher price.
Legging into option positions can enhance profits if things go as expected, but can also lead to greater losses if the market moves against you in between individual leg executions.