What Is Legging In?
Legging in refers to the act of entering multiple individual positions that combine to form an overall position and is often used in options trading.
KEY TAKEAWAYS
Legging in refers to the act of entering multiple individual positions that combine to form an overall position and is often used in options trading.
Legging in to a complex strategy can be advantageous to a trader if putting on the position one piece at a time will prove to be less expensive than establishing it all at once.
There is risk associated with legging in, namely leg risk, which is the risk that the market price in one or more of the desired legs will become unfavorable during the time it takes to complete the various orders.
Understanding Legging In
Legging in can involve establishing a spread, combination, or any other multi-leg position in options one leg at a time, rather than all at once as a single package. Legging in to a complex strategy can be advantageous to a trader if putting on the position one piece at a time will prove to be less expensive than establishing it all at once.
For certain complex positions, if a trader cannot find an eager counterparty who happens to have an axe to put on the exact opposite position, they may not find enough liquidity or a favorable price by quoting it as a spread. Instead, it may be better to leg into the spread one option at a time until finished. Upon taking off, or closing out, a complex position, a trader may similarly leg out of it.
Legging in may also refer to the setting up of an entry position of a complex financial investment separately from setting up the exit or unwinding of the position; or when a debtor or creditor enters into a hedging contract after the debt instrument has been issued or acquired in order to lower financial risk.
Legging in is a common practice used to lower the overall cost when buying and selling complex strategies involving options and futures contracts. Spreading strategies in the options market is popular since it allows a trader or investor to customize a particular profit and loss structure when betting on a specific outcome or set of outcomes in the underlying security.
While there are several standard spreads and combinations, such as vertical call spreads, butterflies, or straddles, a trader can build whatever spread strategy they like. However, complex orders involving more than two options might not find a natural counterparty eager to take the other side of the trade, at least not for a favorable price level. When that is the case, it may be worthwhile and necessary to leg in to the spread piecemeal.