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What is a leg of a trade?

Published on Friday, September 7, 2018 by Team | Modified on Thursday, May 23, 2019

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A leg is a single position taken in trading. Say if you buy 100 shares of a company then that's your 1st leg. Now when you sell the shares later it is your 2nd leg. In advanced trading strategies, in Futures and Options, multi leg orders are used. In such orders 2, 3, 4 legs are executed as part of a single strategy.

What is 1st leg and 2nd leg in trading?

Advanced strategies in Futures and Options involve multi leg orders wherein you place 2, 3 or 4 different orders simultaneously. 1st leg in trading means taking a single position, either Buy or Sell, of an instrument. 2nd leg in trading means taking 2 positions, either Buy-Buy , Buy-Sell, Sell-Buy or Sell-Sell, of an instrument.

What is multi leg order?

Multi Leg orders are used in executing complex strategies in Futures and Options. A multi leg order is a combination of orders. Let's understand it by taking example of Options. Fundamentally, there are only 4 types of orders-

  • Buy Call Option Order
  • Sell Call Option Order
  • Buy Put Option Order
  • Sell Put Option Order

In a multi leg order, you use combination of these orders. Straddle, Strangle, Butterfly and Strangle are some of the examples of a multi leg order. In all these strategies you take more than 1 position in the market.

Multi leg orders are used to-

  • Minimize risks as higher risk in one trade is negated by lower risk in other trade.
  • Minimize losses as losses in one trade are negated by gains in other trade.
  • As a hedging tool.
  • To optimize profits from a given market situation.

Multi leg Order Examples

In a long straddle strategy, you buy a Call Option and sell a Put Option of the same underlying, same expiry date and same strike price. Let's say stock of SBI is trading at ₹300. The Call Option of SBI is available at a premium of ₹15 and the Put Option at the premium of ₹10. To execute a long straddle strategy, you will Buy a Call Option by paying the premium of ₹15 and Sell a Put Option and get a premium of ₹10. This is a multi leg order for Options.

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