Multi-Leg Option Strategies

Publication Date :

22 Jun, 2024

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Table Of Contents

What Is Multi-Leg Option Strategies?

Multi-leg option strategies refer to options trading strategies that involve the simultaneous purchase and sale of options with multiple expiration dates, strike prices, or price sensitivity concerning the underlying asset. These strategies can usually save options traders money as well as time.

A multi-leg options order combines different contracts, and it does not require placing orders individually for every option involved. There are various effective multi-leg option strategies like the long straddle and synthetic long. Traders often use them to make financial gains when they anticipate pricing volatility, but the timing or the direction is unclear.

What Is Multi-Leg Option Strategies?

Multi-leg option strategies refer to trading methods people use to trade options with multiple termination dates, strike prices, or aversion to the underlying asset’s price.
There are various advantages of multi-leg option strategies. For example, they can be cost-effective through the reduction in commissions and upfront margins. Moreover, they can save a trader’s time.
A noteworthy limitation of a multi-leg option strategy is that the losses can be greater than a trader’s investment amount.
A key difference between multi-leg and single-leg option strategies is that traders can use the latter if trends are unclear.

Multi-Leg Option Strategies Explained

Multi-Leg Option Strategies are strategies used by options traders to execute at least two options transactions in a single order. One can sell and buy both put and call options based on their strategy with over one expiration date or strike price. Besides saving traders’ time, such strategies save one’s money because individuals need not execute orders separately, which, in turn, reduces the upfront margin.

The use of such strategies has become quite common because of the electronic trading platforms featuring automation. Prior to the widespread adoption of such strategies, an options trader had to create tickets individually for every leg of a particular trade. Traders utilize these strategies if they wish to execute complicated trades, intending to leverage market conditions and make a profit.

Top Strategies

Let us look at some of the best multi-leg option strategies in detail.

#1 - Bear Put Spread

In this case, traders purchase and sell puts at a high strike price and low strike price, respectively. Note that the puts have an identical expiration date. The traders expect that by the time of expiration, the asset will fall under or move toward the low strike price. This hedged trade lowers the break-even point while multiplying the trader’s money comparatively faster than a long put.

#2 - Bull Call Spread

This strategy involves traders buying a call and selling the same at a low strike price and a high strike price, respectively. Traders anticipate that the price would increase or move toward the latter and the profit generated cannot be more than the difference between both strike prices. The hedged trade lowers the break-even point. Additionally, it multiplies the trader’s money quicker when compared to a long call.

#3 - Long Straddle

This strategy involves traders purchasing a put and a call at an identical strike price, having the same expiration. They expect the underlying asset to move toward either direction by the time of expiry. Note that there is no surety of the direction in this case. There might not be any limit on the trade’s profit. That said, the deduction of the cost incurred to establish the long straddle takes place.

#4 - Synthetic Long

This multi-leg options strategy involves purchasing a call and a put at an identical strike price. Also, they come with the same expiration. Per traders’ expectations, the asset would rise significantly or moderately by the time of expiration. In theory, the upside of such a trade is unlimited. This kind of trade minimizes the upfront capital required while offering the upside associated with a long position.

#5 - Short Straddle

It is the complete opposite of a long straddle. In this case, traders sell a call as well as a put at an identical strike price with the same expiry date. They anticipate the asset to stay range-bound at the time of expiration. The overall profit of the trader cannot be more than the total amount received as a premium.

Examples

Let us look at a few multi-leg options strategies examples to understand the concept better.

Example #1

Suppose stock ABC was trading for $10 per share. Two puts had strike prices of 10$ and $8 and traded at $.50 and $0.25, respectively. The setup of up a trade using the bear put strategy cost Sam, an options trader, $12.5 for each contract, or $25 for the long put (50 shares for every contract x $.50 x 1 contract) minus a $12.5 premium that the trader got because of the short put (50 shares for each contract x 0.25 x 1 contract).

In this case, the maximum upside potential was restricted to the difference between the couple of strike prices.

Example #2

In May 2019, a Denmark-headquartered multi-asset broker, Saxo Bank, introduced multi-legged option strategies to a couple of its trading platforms named SaxTraderPro and SaxoTraderGO. This meant that the traders who used the platform could utilize strategies like straddle, iron condor, etc., quickly.

The option strategies were pre-filled, and all clients could place orders to sell or buy various options from an identical order ticket. With this new move, the company aimed to allow the clients to easily utilize established trading techniques and make financial gains.

Benefits

The advantages of using multi-leg option strategies are as follows:

Since the submission of multiple legs of a trade takes place simultaneously, the execution is smoother for an options trader.
These strategies minimize the latency risk as well as the time lag associated with entering different option positions manually.
The strategies can help minimize the overall risk in a market and improve the chances of generating profits.
Such strategies lower the margin and commission requirements.
As noted above, these strategies save traders’ time.

Limitations

Let us look at the limitations of multi-leg options trading strategies.

These strategies are risky and, hence, are not suitable for all traders.
Losses can be even more than the initially invested amount.

Multi-Leg Option Strategies vs Single-Leg Option Strategies

For new option traders, the concept of multi-leg and single-leg strategies can lead to confusion. They can clear all their doubts by knowing the key differences below.

Multi-Leg Option Strategies	Single-Leg Option Strategies
Typically, these strategies are more complex.	These are generally more straightforward.
One can apply these techniques when the market has them second-guessing	Such strategies can be extremely useful when clear market trends exist in the market.
Profit ranges can be more restricted.	There can be less restrictions on the profit ranges.

Frequently Asked Questions (FAQs)

1. What is the iron butterfly multi-leg option strategy?

In the case of an iron butterfly, traders buy a call option having a strike price over the target price. Moreover, they sell a put and a call utilizing the strike price that is close to the target price and purchase a put option having a strike price well under the target price. Note that all options have an identical expiration date. The strategy’s name comes from its graph, which resembles the shape of a butterfly.

2. Are multi-leg option strategies versatile?

Yes, these strategies are versatile, as individuals can utilize them to their advantage in bull, neutral, or bear markets. However, people must evaluate their risk appetite before using these techniques.

3. What is the iron condor multi-leg option strategy?

This strategy involves traders purchasing an out-of-the-money put and selling a put near the money put while buying an out-of-the-money call and selling a call near the money. Note that every option has an identical expiration date.