Legging a position refers to entering, exiting or rolling a spread trade with multiple orders instead of one single order. As an example, that could mean taking off the short Vertical Put Spread half of an Iron Condor while leaving on the Call Spread. We might exit the Call Spread a few seconds, minutes hours, or days later. Knowing this, the questions are: why do we generally avoid legging spreads, when must we leg a spread, and how should we do so?
There are times though when we have no choice but to leg a spread. Sometimes the product does not support spread orders. While some Futures markets have a spread market for inter month spreads others do not. All equity Pairs Trades must be legged. There are also instances in which the best markets are on different exchanges, so by legging, we could be filled at better prices.
So if we have to leg a trade, which side do we do first? Sometimes there is no choice. When trading an IRA account (and sometimes in a smaller account), we have to trade the long side first on entering, and when exiting we have to lift the short side first. Otherwise, we should work the “difficult” side first. The difficult leg can be the least liquid side, the one with the widest Bid-Ask Spread, or the part of the trade with the largest Delta (and therefore more risk). It’s important to understand your risks before legging.
Generally speaking, we want to avoid legging for several reasons. It adds little value. More often, we can get a better fill on the entire spread as the risk to the counterparty to the trade is lower. The advantage we gain from legging is incremental, while the risk is exponential. Most importantly for tastylivers, legging just isn’t mechanical. Lastly, our studies show that managing winning spreads as a complete package, historically outperforms legging.
Watch this segment of Options Jive with Tom Sosnoff and Tony Battista for the important takeaways and to learn why we generally don’t leg and how to do it when we must.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.