We know options allow traders to speculate and trade against an underlying asset (a stock, index, commodity etc.). Options, therefore, are a derivative asset class. Options give investors the right to buy or sell a particular asset at a particular price on a predetermined date.
A call option gives an investor the right to buy an asset at a particular price and a put option gives investors the right to sell an asset at a particular price. The predetermined price in both these cases is called the strike price.
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Now, there may be circumstances that require traders to place both buy and sell options orders simultaneously, that's where multi-leg options orders come into the picture. With multi-leg options orders, you can place multiple buy and sell orders simultaneously without having to do that one by one. This can help you make the most of the prevailing market conditions.
Multi-leg option orders come with many benefits, such as they save both time and money. They may also save up on margin costs. In this article, we shall discuss some benefits and strategies for multi-leg options trading.
1. Risk Management: Using multiple-leg options orders allows you to utilise more complex strategies. These can help reduce overall risk in the market and increase your chances of profits.
Using the flexibility of multiple-leg options orders, it is possible to buy and sell at variable strike prices. Thus, you can save yourself from unforeseen losses.
2. Increased Chances of Profit: Compared to a single options trade, multiple-leg orders have a higher potential for profits. Such orders are able to navigate better through different market conditions, offering traders more options to make money.
3. Lower Cost: Lower costs are probably one of the biggest advantages of multiple-leg option orders. These orders not only help you save on margin costs but also involve lower overall fees compared to placing buy or sell orders individually.
4. Hedging: Multiple-leg options orders allow for great hedging strategies to overcome potential losses.
5. Saving Capital: Lastly, using multiple-leg options trading strategies helps you save yourself from losing all invested capital. Thus, the risk for downside is minimised.
Multi-leg options trading is an advanced arena that may not always be suitable for beginners. Even advanced traders often follow specific strategies when it comes to multi-leg options trading. Some of these strategies are as follows:
Other multi-leg options trading strategies include the collar, strangle, diagonal or vertical spreads, etc. Each of these trading strategies employs the use of multi-leg options to earn a profit. The two or more legs are linked with each other in all these strategies.
Multi-leg options trading is a valuable way to trade options in the market. Although an advanced trading concept, it is often put to use by experienced traders to meet their demands for profit and narrow their downside potential. Using strategies built around this concept has a learning curve, which, if mastered, can open doors for unlimited gains.