Multi-Leg Options Order

What Is a Multi-Leg Options Order?

A multi-leg options order is an order 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 that is completed at once. Because the order includes a combination of different contracts, it differs from legging into or out of a multi-leg strategy one by one.

Multi-leg options orders, such as spreads and butterflies, are often used to capture profits when pricing volatility is expected but the direction and/or timing is unclear.

Understanding Multi-Leg Options Orders

A multi-leg options order is used to enter complex strategies at once, instead of placing 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 commissions owed and margin requirements are typically less with some brokers when a multi-leg trade is executed as a unit rather than via several individual orders.

Multi-leg options orders are common now, especially with the advent of automated electronic trading platforms. Before their widespread adoption, a trader would have needed to create individual tickets for each leg of the trade and then submit each of them to the market.

A multi-leg option order submits both legs of the trade simultaneously, making execution much smoother for the options trader. Moreover, having both orders go in at the same time removes some of the latency risk and time lag of entering multiple option positions manually.

Examples of Multi-Leg Options Orders

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, and 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 has a bid-ask spread of $0.05 and a $7.00 plus $0.50 per-contract commission, for a total of $15.10.