Alert

Looking for even more trade ideas? Sign up for Alpha Boost, a FREE email from quiet foundation!

Multi-Leg Position Delta: Leave No Leg Behind

Feb 16, 2016

By: Josh Fabian

At tastytrade, option spreads like verticals, short strangles and iron condors form the core of our strategies. And those strategies involve two or more options.

Take a short strangle. It’s short an OTM call and an OTM put. We enter that short strangle as one single transaction so we have the short call and short put in our account simultaneously. We don’t “leg” into the short strangle by selling the put, for example, then waiting a while and selling the call. But why not?

It comes down to delta.

A short strangle has a pretty low delta because the long deltas from the short put are offset by the short deltas of the short call. And the goal of a short strangle is to make money from time decay, not picking the direction of the stock or index. Legging into a short strangle turns the low delta time decay trade into a high delta trade that depends on guessing the direction of the stock price correctly. And all our research at tastytrade suggests that stocks have a 50/50 chance of moving higher or lower. Do you like to have your money rely on a coin flip? Neither do we.

Here’s a real-life example: MSFT has 57% IV rank. I don’t know which way MSFT is going to go, but I want to collect some of the rich option premium that the 57% IV rank provides. With MSFT at $51.50 (as of Jan. 28), the March weekly 49.5 puts have a 32 delta and the 53.5 calls have a 32 delta. The short put would create +32 deltas and the short call -32 deltas, and give the short 49.5/53.5 strangle a delta of 0. If I try legging into the strangle by selling the 49.5 put first, I have +32 deltas in my account.

If MSFT goes up, great! But if MSFT goes down, I’m long 32 shares of the stock. Not so great. I don’t really want many long or short MSFT deltas in my account, so I enter the short strangle as one trade.

Some people think that they can get a better price for a short strangle, for example, by legging into it. Sell the put and see if the stock rallies so they can sell the call at a higher price. Do that, and you’re really trading a 50/50 stock bet. That’s not the tastytrade way. Focus on the time decay and probability. Those are things you can control.


Josh Fabian has been trading futures and derivatives for more than 25 years.

For more on this topic see:

From Theory to Practice: Expected Move Calculation January 27, 2016
Confirm and Send: I’ve Lost My Short Deltas August 25, 2015


Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”). tastytrade is a trademark/servicemark owned by tastytrade.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.

© copyright 2013 – 2021 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.