What is a Long Leg
Long leg is a part of a unit spread strategy that involves taking two positions simultaneously to generate a profit.
BREAKING DOWN Long Leg
Long leg investments can be used in a wide range of unit spread scenarios. Generally, a long leg position is entered with a simultaneous short leg position. The combination of the two positions is referred to as a unit trade or spread investment.
There are many established spread trade strategies in the investing market and investors also commonly create their own spread trades to capitalize on potential profit opportunities. Spread trades are generally used primarily in the derivatives market where a spread derivatives trade on an underlying asset can be identified and entered due to the steady volatility, supply and demand that fuel the markets for derivatives.
A unit trade can be a way to lock in guaranteed profits by obtaining a long and short position that when exercised result in a specified payout. One of the safest unit trades involves a long leg in an underlying asset at a specific price with a futures contract to sell the asset for a higher price at a specified expiration date. In futures contracts the holder of the contract is obligated to execute the transaction at expiration, therefore they can count on a guaranteed profit.
Option market spreads can be more complicated with less availability for guaranteed profit. Options give the holder the right but not the obligation to execute a transaction at the contract’s terms. Futures market investors may seek to trade worthless contracts near expiration while option investors merely bypass the option to exercise. In an option spread an investor could enter a long leg and short leg to speculate on profit opportunities from option market contracts listed on an underlying asset. (See also: Option Spread Strategies)
For one example, consider a bull call option spread on a stock trading at $25. This spread would involve buying a call option at a strike price of say $26, and the simultaneous sale of a call option at a higher strike price, say $27. Both options would have the same expiration date. In this case, the $26 call constitutes the long leg of the spread, while the $27 call makes up the short leg.
Spreads involving two derivative positions will generally have much higher risk than spreads in which the long leg involves owning the underlying asset outright. Profit or loss from spread trades is generally followed through payoff diagrams which chart payoffs based on movements of the underlying asset.