Leg Out

Leg Out – partially exit an original option spread by taking off any combination of individual options or option spreads from the original trade. For example if the original trade was a short put spread, imagine that over time the underlying moved down so much that the short put spread was now in the money. With a few days left to go into expiration a trader could decide that the underlying was definitely going to move up quickly, so they could take off the long put (and pocket any remaining time value) and leave on the short put into expiration (to allow all the time value to decay out of the short put). This is generally discouraged because firstly it assumes you “know” what is going to happen. Secondly the probabilities of the original trade have been adjusted, so it no longer represents exactly the original trade risk reward. One advantage of option spread trading is that each option spread has a theoritically probability of profit when you enter the trade, and theoretically if you run enough of them you ought to be able to get more predictable trading results. If you keep legging in and out of your spreads you mess with these original trade probabilities. Generally over the long term legging doesn’t improve your results unless you have a particular good ticker sense about exactly when to exit – in which case you should probably be day trading anyway! In summary, legging makes you feel smarter and gives a lot more entertain factor when exiting, however in the long run it doesn’t tend to improve your results. In summary with limited risk reward option spreads taking all option legs off at the same time is the best long term bet. “on as a package, off as a package” is generally a good trading rule.

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