# Understanding Legs in Trading: Strategies and Applications

## What Is a Leg?

A leg is one piece of a multi-part trade strategy, often in [derivatives](https://www.investopedia.com/terms/d/derivative.asp) trading, in which a trader combines multiple options or futures contracts. In rare cases, they might combine both types of contracts to [hedge](https://www.investopedia.com/terms/h/hedge.asp) a position, benefit from arbitrage, or profit from a spread widening or tightening. Within these strategies, each derivative contract or position in the underlying security is called a leg.

When entering into a multi-leg position, it is known as "[legging-in](https://www.investopedia.com/terms/l/legging-in.asp)" to the trade. Exiting this type of position is called "[legging-out](https://www.investopedia.com/terms/l/leg-out.asp)". In these complex strategies, timing is essential for avoiding price risks.

### Key Takeaways

*   A leg is one component of a multi-part derivatives trading strategy, such as combining options or futures contracts.
*   Traders enter multi-leg positions to hedge, gain from arbitrage, or exploit spread changes.
*   Timing is crucial in multi-leg strategies to avoid price risk and optimize trade outcomes.
*   A long straddle involves two legs, using a call and a put to profit regardless of price direction.
*   The iron condor is a four-leg strategy aiming to profit from minimal price movement within a specific range.

## Exploring Trading Strategy Legs

A leg is one part or one side of a multi-step or [multi-leg](https://www.investopedia.com/terms/m/multilegorder.asp) trade. These kinds of trades are just like a race of a long journey–they have multiple parts or legs. They are used in place of individual trades, especially when the trades require more complex strategies. A leg can include the simultaneous purchase and sale of a security.

For legs to work, it's important to consider timing. The legs should be exercised at the same time in order to avoid any risks associated with fluctuations in the price of the related security. In other words, a purchase and a sale should be made around the same time to avoid any [price risk](https://www.investopedia.com/terms/p/pricerisk.asp).

There are multiple types of legs, which are outlined below.

## Decoding Legs in Options Trading

[Options](https://www.investopedia.com/terms/o/optionscontract.asp) are derivative contracts that give traders the right, but not the obligation, to buy or sell the underlying security for an agreed-upon price—also known as the [strike price](https://www.investopedia.com/terms/s/strikeprice.asp)—on or before a certain expiration date. When making a purchase, a trader initiates a [call](https://www.investopedia.com/terms/c/calloption.asp) option. When selling, it's a [put](https://www.investopedia.com/terms/p/putoption.asp) option.

The simplest options strategies involve just one contract and are called single-legged, with four basic forms.

![Leg](https://www.investopedia.com/thmb/yybXiexPNa38dpa3X7CZ176ubEk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/INV-terms-l-leg-29f614b04d3041f3b9b69e1945de0765.jpg)

*— Investopedia / Sabrina Jiang*

A fifth form, the cash-secured put, involves selling a put option and keeping the cash on hand to buy the underlying security if the option is [exercised](https://www.investopedia.com/terms/e/exercise.asp).

Traders combine these options and positions to construct complex bets on price movements, [leveraging](https://www.investopedia.com/terms/l/leverage.asp) potential gains, limiting losses, and profiting through [arbitrage](https://www.investopedia.com/terms/a/arbitrage.asp) from market inefficiencies.

### Two-Leg Strategy: Long Straddle

The [long straddle](https://www.investopedia.com/terms/l/longstraddle.asp) consists of two legs: a long call and a long put, ideal for traders expecting a price change without a clear direction.

An investor breaks even if the price increases or decreases by their net debit, which includes the contract price and fees. Profits arise if prices move further, while losses are limited to the net debit.

As the chart below shows, the combination of these two contracts yields a profit regardless of whether the [underlying security's](https://www.investopedia.com/terms/u/underlying-security.asp) price rises or falls.

### Three-Leg Strategy: Collar

The [collar](https://www.investopedia.com/terms/c/collar.asp) is a protective strategy used on a [long](https://www.investopedia.com/terms/l/long.asp) stock position. It comprises three legs:

*   A long position in the underlying security
*   A long put
*   A short call

This combination amounts to a bet that the underlying price will go up, but it's hedged by the long put, which limits the potential for loss. This combination is called a [protective put](https://www.investopedia.com/terms/p/protective-put.asp). Adding a short call limits potential profit but offsets the put's cost, possibly lowering or neutralizing the net debit.

This strategy is usually used by traders who are slightly bullish and don't expect large increases in price.

### Four-Leg Strategy: Iron Condor

The [iron condor](https://www.investopedia.com/terms/i/ironcondor.asp) is a complex, is a complex, limited-risk strategy aiming to profit if the underlying price stays stable. Ideally, at expiration, the price should fall between the short put and call strike prices. Profits are capped at the net credit the investor receives after buying and selling the contracts, but the maximum loss is also limited.

Building this strategy requires four legs or steps. You buy a put, sell a put, buy a call and sell a call at the relative strike prices shown below. The expiration dates should be close to each other, if not identical, and the ideal scenario is that every contract will expire [out of the money](https://www.investopedia.com/terms/o/outofthemoney.asp) (OTM)—that is, worthless.

## Exploring Futures Contract Legs

[Futures](https://www.investopedia.com/terms/f/futures.asp) contracts can also be combined, with each contract constituting a leg of a larger strategy. These strategies include [calendar spreads](https://www.investopedia.com/terms/c/calendarspread.asp), where a trader sells a futures contract with one delivery date and buys a contract for the same commodity with a different delivery date. Buying a contract that expires relatively soon and shorting a later (or "deferred") contract is bullish, and vice-versa.

Other strategies attempt to profit from the spread between different commodity prices such as the [crack spread](https://www.investopedia.com/terms/c/crackspread.asp)—the difference between oil and its byproducts—or the [spark spread](https://www.investopedia.com/terms/s/sparkspread.asp)—the difference between the price of natural gas and electricity from gas-fired plants.

## The Bottom Line

A "leg" is a component of a multi-leg derivatives trading strategy, which can include combinations of options or futures contracts. These trading strategies can be employed to hedge, profit from arbitrage opportunities, or speculate on price movements through spreads.

When using a multi-leg derivatives trading strategy, the timing of managing legs in a trade is crucial for minimizing price risk—trades must be executed simultaneously.

Several different strategies can be used, such as single-legged options, two-leg strategies like long straddles, three-leg strategies like collars, and four-leg strategies like iron condors. Futures contracts can also form part of multi-leg strategies and involve different spreads to manage trading positions.

Before attempting one of these strategies, it's essential to understand their purpose, how to tailor them to your trading goals, how to manage risk and maximize profits, and to practice regularly.