What is a Multi-Leg Options Order?
A multi-leg options order is a type of order used to simultaneously buy and sell options with more than one strike price, expiration date, or sensitivity to the underlying asset's price. Basically a multi-leg options order refers to any trade that involves two or more options. Multi-leg options orders are generally used to capture profits when pricing volatility is expected but direction is unclear.
Understanding Multi-Leg Options Orders
A multi-leg options order is used to enter complex strategies instead of using individual orders for each option involved. This type of order is primarily used in multi-legged strategies such as a straddle, strangle, ratio spread, and butterfly. The commission and margin requirements may be less with some brokers when a multi-leg trade is executed as a unit rather than several individual orders.
Multi-leg options orders are common now, but prior to their widespread adoption, a trader would have to create a ticket for one leg of the trade and submit it to market, and then create the second leg and submit it. A multi-leg option order submits both legs of the trade simultaneously, making execution much smoother for the options trader. Moreover, by having both orders go in at the same time it removes some of the time risk usually introduced by the time lag between entering multiple option positions manually.
- Multi-leg options orders allow traders to carry out an options strategy with a single order.
- Multi-leg options orders save traders time and usually money, as well.
- Traders use multi-leg orders for complex trades where there is less confidence in the trend direction.
Example of a Multi-Leg Options Order
Multi-leg options orders are more advanced than simply entering a put or a call on a stock you are making a directional bet on. A common multi-leg options order is a straddle where a trader buys both a put and a call at or near the current price. The straddle has two legs: the long call option and the long put option. This multi-leg order simply needs the underlying asset to see enough price movement to create a profit - the direction of that price movement is irrelevant as long as the magnitude is there. A more nuanced multi-leg options order is a strangle where there is a direction favored by the trade along with less protection against the opposite move. Depending on the trading platform, investors can state their trading idea and a multi-leg order will be suggested to capitalize on that idea.
Multi-Leg Options Orders and Trade Cost Savings
A multi-leg option order may also make it easier to plan for the cost of the trade's bid-ask spread costs. For example, one multi-leg order can be used to buy a call option with a strike price of $35, a put option with a strike price of $35 and the same expiration date as the call to construct a straddle strategy. Assume that the costs of the trade are a combined bid-ask spread of $0.07, and a commission of $7.00 plus $.50 per contract, for a total of $8.07. Contrast the multi-leg order with entering the trade for the same call and put in separate orders, each of which have a bid-ask spread of $0.05 and a $7.00 plus $0.50 per-contract commission, for a total of $15.10.