What a leg is
Each leg is one option: a call or a put, bought or sold, at one strike and expiry. A strategy of several legs is judged by the combined payoff at expiry and by how its value moves before then. Writing down every leg, with its direction, strike and quantity, is the starting point for understanding any structure.
Common structures
- Vertical spread: buy one option and sell another of the same type at a different strike. Both the gain and the loss are capped.
- Straddle: a call and a put at the same strike. A bought straddle gains from a large move either way; a sold one gains from a quiet market and carries large risk.
- Strangle: like a straddle, but with the call and put at different strikes, which lowers the cost and widens the range that loses.
- Iron condor: a sold strangle protected by bought options further out, giving a defined maximum loss and a defined maximum gain.
- Calendar spread: options of the same strike with different expiries, which depends on time decay and volatility.
What changes the value
- Price of the underlying (delta): how much the position gains or loses as the index or stock moves.
- Time (theta): options lose time value as expiry approaches, which helps sellers and hurts buyers.
- Volatility (vega): rising expected volatility lifts option prices; falling volatility reduces them.
- Curvature (gamma): how quickly delta itself changes, which becomes sharp near expiry.
Defined risk versus open risk
Structures with bought protection, such as spreads and condors, have a known worst case when opened. Selling options without protection can lose far more than the premium received. Knowing the maximum loss before entry, and sizing so you can bear it, is the central rule of options risk.
Automating a multi-leg idea
Automating a structure means writing down when to open it, how the strikes are chosen, when to adjust or close it, and the loss at which everything exits. Each of those must be explicit. It is also worth testing with realistic costs, because several legs mean several sets of brokerage and charges, and wide bid-ask spreads can erase a thin edge.