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Legging Into and Out of Trades

Legging a trade refers to the opening or closing of each leg for a non-naked strategy in separate transactions.

For example, instead of routing an order to open or close an Iron Condor as one transaction, we might decide to close just our put spread or just our call spread. Legging out of trades can help us get filled quicker, but it can also expose us to unwanted risk. Opening and closing trades as one transaction allows us to stick to our original strategy. In general, legging into trades is done to achieve a better overall trade entry price than entering the trade as a whole. An example of legging into a trade such as an iron condor would be to sell a put spread into a down move and waiting to sell the call spread after a stock runs back up. This method will outperform if an individual can time the market, but will generally underperform otherwise.

One scenario where legging out of a trade may be logical is when we need to exit a trade quickly, much like we do after an earnings play. For example, if we sold a wide iron butterfly for earnings and the stock opened up unchanged, we may decide to buy back the short straddle component of the trade to get filled faster. In this scenario all we are doing is legging out of our risk.

We try to avoid legging into and out of spreads entirely. All things considered, we do not believe that legging a trade is a sound mechanical solution to our logical trading methodology. However, there is a time and place for utilizing this strategy.
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