What Is a Long Leg?
A long leg is part of a spread or combination strategy that involves taking two positions simultaneously to generate a profit.
How a Long Leg Works
Long leg investments can be used in a wide range of spread and combination 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. Multi-legged derivatives trades on an underlying asset can be identified and positioned to take advantage of volatility, supply and demand, and directional bets.
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 and then selling a futures contract on the asset for a higher price at a specified expiration date. With a futures contract, the holder of the contract is obligated to execute the transaction at expiration, therefore they can count on a guaranteed profit.
Option spreads can be more complicated with no guarantee in profits. Options give the holder the right but not the obligation to buy/sell the underlying at the contract’s terms. Holding an option gives the investor the "option" to exercise the contract at the strike price. In an option spread an investor could enter a long leg and short leg to speculate on profit opportunities based on expectations of underlying asset.
Example of a Long Leg
For one example, consider a bull call 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.