One of the most powerful techniques in options trading is the ability to add legs to existing positions. This skill allows you to transform simple single-option trades into spreads, reduce risk, lock in profits, or change your market outlook without closing your original position.
What Does Adding a Leg Mean?
A "leg" in options trading refers to one component of a multi-leg options strategy. When you add a leg, you are buying or selling another option to combine with your existing position. This creates a spread or more complex strategy.
Simple definition: Adding a leg means opening a second (or third, or fourth) options position that works together with your existing position to create a new combined strategy.
Why Add Legs to Your Trades?
There are several strategic reasons to add legs to your options positions:
- Reduce risk: Convert an unlimited-risk position into a defined-risk spread
- Lower cost basis: Sell an option against your long position to reduce what you paid
- Lock in profits: Add a protective leg when your trade is winning
- Change your outlook: Modify your position if your view on the stock changes
- Free up capital: Spreads often require less margin than single options
Common Leg Additions
Long Call to Call Spread
If you own a call option that has increased in value, you can sell a higher strike call to create a bull call spread. This locks in some profit and reduces your risk.
Example
You bought a $100 call for $3.00 when the stock was at $100. The stock rallied to $108 and your call is now worth $10.00.
- Sell the $110 call for $4.00
- You now have a $100/$110 call spread
- Your cost basis is now negative ($3.00 paid minus $4.00 received = -$1.00)
- You are guaranteed at least $1.00 profit, with max profit of $11.00 if stock stays above $110
Long Put to Put Spread
Same concept as above but for puts. If your long put is profitable, sell a lower strike put to create a bear put spread.
Short Put to Put Credit Spread
If you sold a naked put and want to limit your risk, buy a lower strike put to convert it into a credit spread.
Example
You sold a $50 put for $2.00. The stock dropped and you are worried about further downside.
- Buy the $45 put for $0.75
- You now have a $50/$45 put credit spread
- Your maximum loss is now $5.00 minus $1.25 net credit = $3.75 instead of $48.00
Single Option to Iron Condor
You can add multiple legs to create complex strategies. For example, if you have a credit spread, you can add another credit spread on the opposite side to create an iron condor.
Legging In vs Entering as a Spread
You have two choices when creating a spread: enter all legs at once, or leg in one at a time. Each approach has pros and cons.
Entering as a Spread (All at Once)
- Pros: Guaranteed fill on all legs, known net price, simpler execution
- Cons: May get worse pricing than legging in separately
Legging In (One at a Time)
- Pros: Potentially better prices, flexibility to wait for optimal entry
- Cons: Risk of only getting filled on one leg, requires more monitoring
Pro tip: Legging in works best in liquid markets where you can quickly execute the second leg. In illiquid options, always enter as a spread to avoid getting stuck with only half a position.
Timing Your Leg Additions
The timing of when you add a leg can significantly impact your results. Here are some guidelines:
Add Legs to Winners
When your position is profitable, adding a leg can lock in gains while still allowing for more upside. This is a low-risk adjustment.
Add Legs to Losers (Carefully)
Adding a leg to a losing position can reduce your risk, but be careful not to throw good money after bad. Only add legs to losers if you still believe in the trade.
Add Legs Before Events
If you have an open position going into earnings or another event, consider adding a protective leg to limit your risk.
The Risks of Adding Legs
While adding legs can be beneficial, there are risks to consider:
- Execution risk: You might not get filled on the second leg at your desired price
- Limiting upside: Many leg additions cap your potential profit
- Complexity: More legs mean more to manage and track
- Commission costs: Each leg adds transaction costs
Practical Tips for Adding Legs
- Use limit orders: Always use limit orders when adding legs to control your price
- Calculate breakevens: Know your new breakeven points after adding a leg
- Consider liquidity: Only leg into liquid options where you can get good fills
- Have a plan: Know in advance when you will add legs and at what prices
- Track your positions: Keep detailed records of all legs and adjustments
Track Multi-Leg Positions Easily
Pro Trader Dashboard automatically groups your options legs into strategies and tracks your overall position P&L. See all your spreads and adjustments in one place.
Summary
Adding legs to your options trades is a versatile technique that can help you manage risk, lock in profits, and adapt to changing market conditions. The most common applications include converting long options into spreads and adding protection to naked short options. Master this skill and you will have much more flexibility in how you manage your options portfolio.
Ready to learn more? Explore our guides on adjusting losing options and understanding Greeks for spreads.