"Legging" into an options position

[ashc48]

I would be interested in knowing if most folks prefer to “leg” into a multi-leg complex options position as opposed to completing the transaction simultaneously.

For those that do, are you shooting for a relatively small advantage (5-10c) or do you attempt to get a bigger price move in your favor (25c or more)? Are you attempting to complete the position in a relatively short time (1-3 days) after the initial leg is initiated? Success rate?

If you are willing to wait a number of days to get better prices, in your experience is the risk of the stock going against you worth the reward? And should the stock move in the wrong direction, is it better to try to salvage the position or just give up and move on to the next position?

Thanks in advance

 

[Pabst]

Quote from ashc48:

I would be interested in knowing if most folks prefer to “leg” into a multi-leg complex options position as opposed to completing the transaction simultaneously.

For those that do, are you shooting for a relatively small advantage (5-10c) or do you attempt to get a bigger price move in your favor (25c or more)? Are you attempting to complete the position in a relatively short time (1-3 days) after the initial leg is initiated? Success rate?

If you are willing to wait a number of days to get better prices, in your experience is the risk of the stock going against you worth the reward? And should the stock move in the wrong direction, is it better to try to salvage the position or just give up and move on to the next position?

Thanks in advance

Actually I "legged" into some QQQ butterflies today. What a blast selling those 37 calls naked short when the ETF was trading at 36.52.

 

[Hello_Dollars]

Quote from ashc48:

I would be interested in knowing if most folks prefer to “leg” into a multi-leg complex options position as opposed to completing the transaction simultaneously.

For those that do, are you shooting for a relatively small advantage (5-10c) or do you attempt to get a bigger price move in your favor (25c or more)? Are you attempting to complete the position in a relatively short time (1-3 days) after the initial leg is initiated? Success rate?

If you are willing to wait a number of days to get better prices, in your experience is the risk of the stock going against you worth the reward? And should the stock move in the wrong direction, is it better to try to salvage the position or just give up and move on to the next position?

Thanks in advance

It depends. For multi-leg spreads like iron condors or long flys, I'll often go days with only one side of the spread on (i.e. I'll sell a bear call spread into a rally and wait as long as it takes for the expected pullback before selling the put spread to complete the iron condor, or vice versa). However, I won't do the same with a simple 2-leg spread, which I either enter as a completed spread or leg into intraday. But there's no "right" way to do it. It just depends on the style and risk level you're comfortable with.

 

[Maverick74]

Quote from ashc48:

I would be interested in knowing if most folks prefer to “leg” into a multi-leg complex options position as opposed to completing the transaction simultaneously.

For those that do, are you shooting for a relatively small advantage (5-10c) or do you attempt to get a bigger price move in your favor (25c or more)? Are you attempting to complete the position in a relatively short time (1-3 days) after the initial leg is initiated? Success rate?

If you are willing to wait a number of days to get better prices, in your experience is the risk of the stock going against you worth the reward? And should the stock move in the wrong direction, is it better to try to salvage the position or just give up and move on to the next position?

Thanks in advance

Think about it this way. If you leg into your positions on a regular basis and you find that it cost you money, then don't. If you find that you consistently make money at it, you are probably better off just trading the underlying. Just my two cents.

If you want a more technical response, well, it depends on the delta of the option you are legging into. The more deltas the option has, the more difficult it is and the more risk you are taking. The inverse is true for low delta options.

 

[nodelta]

Quote from ashc48:

I would be interested in knowing if most folks prefer to “leg” into a multi-leg complex options position as opposed to completing the transaction simultaneously.

Depends on the type of trade and your skills.

If you can find a way to hedge w/the underlying while waiting for the other side to come around, that may be an option (pun intended).

Just make sure you're not taking on hedge losses while waiting.

Legging usually boils down to some directional bias. So, your talent at trading direction will determine whether you should leg or not.

I happen to leg just about every position I get into due to the low level of implieds.

 

[ertrader1]

Plain and simple stocks move and are qouted by pennies......PERIOD......options are qouted and move by nickels...PERIOD.

Just trade the underlyer is absolutly what i abondend after 2000.

RIMM, SEPR are not the norm in "underlyers" but nickle moves as the minum are the norm in options...so do the math.....

 

[TempusFugit]

Quote from ashc48:

I would be interested in knowing if most folks prefer to “leg” into a multi-leg complex options position as opposed to completing the transaction simultaneously.

For those that do, are you shooting for a relatively small advantage (5-10c) or do you attempt to get a bigger price move in your favor (25c or more)? Are you attempting to complete the position in a relatively short time (1-3 days) after the initial leg is initiated? Success rate?

If you are willing to wait a number of days to get better prices, in your experience is the risk of the stock going against you worth the reward? And should the stock move in the wrong direction, is it better to try to salvage the position or just give up and move on to the next position?

Thanks in advance

Legging in = speculation IMHO. Be prepared to do it successfully 9 out of 10 times and lose it back on the 10th. I've paid some expensive tuition on this lesson.

On the other hand, I've noticed for the index options I deal with that if I try to shave a nickel or dime that I often get filled quickly (with minutes).

I look at the value of the spread between my fill price and fair price. Say I'm selling an MNX straddle for $3.00 per leg. Current B/A spread is 30 cents so the quoted value from Fair Price is 15 cents or 5% of the written premium. I think of it as commission (market makers have to eat don't they?) and like to keep it under 3%.

So if I put in limit orders at .05 or even .10 above the bid I will often get filled on at least one leg. If only one fills quickly I will turn around and just sell at the bid on the other leg. To hold an unhedged postion longer incurs great directional risk.

If I get a nickel shaved off of each leg it lowers the "commission" from 5% to 3.3%, not a huge amount but worth taking if available.

 

[peg_leg_joe]

Quote from TempusFugit:

Legging in = speculation IMHO. Be prepared to do it successfully 9 out of 10 times and lose it back on the 10th. I've paid some expensive tuition on this lesson.

On the other hand, I've noticed for the index options I deal with that if I try to shave a nickel or dime that I often get filled quickly (with minutes).

I look at the value of the spread between my fill price and fair price. Say I'm selling an MNX straddle for $3.00 per leg. Current B/A spread is 30 cents so the quoted value from Fair Price is 15 cents or 5% of the written premium. I think of it as commission (market makers have to eat don't they?) and like to keep it under 3%.

So if I put in limit orders at .05 or even .10 above the bid I will often get filled on at least one leg. If only one fills quickly I will turn around and just sell at the bid on the other leg. To hold an unhedged postion longer incurs great directional risk.

If I get a nickel shaved off of each leg it lowers the "commission" from 5% to 3.3%, not a huge amount but worth taking if available.

I just started trading multiple-leg spreads recently, so I'm a newbie in this area. But I have already found that, as the person quoted above mentioned, in the index options, it is relatively easy to get filled 10c or more better than the posted B/A. A little patience and the willingness to let the market wiggle into your limit orders seems to work well. But remember, I'm new at this, so maybe I've just been getting lucky and I won't be able to do this consistently going forward. We'll have to wait and see.