Definition of 'Leg'
For example, a simple call option consists of a single leg, which is the purchase of a call option. A more complex strategy, such as a straddle, consists of two legs, which are the purchase of a call option and the sale of a put option with the same strike price and expiration date.
The legs of an option strategy can be either long or short. A long leg is a position in which the option buyer has the right to purchase or sell the underlying asset at a specified price. A short leg is a position in which the option seller has the obligation to purchase or sell the underlying asset at a specified price.
The payoff of an option strategy is determined by the performance of the underlying asset and the relationship between the strike prices and expiration dates of the options in the strategy.
For example, a long call option will have a positive payoff if the underlying asset price rises above the strike price. A short call option will have a positive payoff if the underlying asset price falls below the strike price.
The payoff of a straddle is determined by the difference between the strike prices of the call and put options. If the underlying asset price is above the higher strike price, the straddle will have a positive payoff. If the underlying asset price is below the lower strike price, the straddle will have a negative payoff.
The legs of an option strategy can be combined in a variety of ways to create different risk profiles and payoff structures. Option strategies can be used to hedge against risk, speculate on the future price of an underlying asset, or generate income.
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