What Is a Multi-Leg Options Order
Introduction
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.
Open Your free Demat Account in just 5 minutes!
What is Multi-Leg Options Trading?
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.
What are the Benefits of Multi-leg Options Orders?
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.
Some Multi-Leg Options Trading Strategies
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:
- Butterfly Spread: This options trading strategy combines a bull and a bear spread with the same date of expiration but with three different strike prices. Although the range for making profits is narrow, the loss potential is fixed.
- Straddle: Another common multi-leg options trading strategy is the straddle. This involves simultaneously buying a call option and a put option with the same strike price and expiration date. This strategy becomes profitable only in case there is a fall or a rise in the strike price of more than the premium paid by the trader. This is a good strategy for volatile markets with an unlimited profit potential.
- Iron Condor: This strategy consists of four strike prices (two puts and two calls) with the same expiration date. This strategy is useful for profit in a sideways market. It is when the underlying asset price closes in the range of the iron condor that one makes the most profit.
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.
Afterthoughts
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.
Related Articles: All about options trading in commodities | 7 Best Bearish Options Trading Strategies | Using options to play a bearish equity market
