How to Define the Side of a Multi-Leg Options Order
Summary
The document asks how to assign an overall buy or sell direction to a complex order containing several options and a stock leg, and how to recognize an identical order versus one with every leg reversed. Its central lesson is that a structure’s direction depends on the specific strategy and its legs. A familiar structure such as a butterfly can have a conventional buy or sell interpretation, but the example given is too ambiguous to classify without more detail about what the legs form.
The answers recommend communicating the actual instruments and sides of every leg when trading a structure. Put-call parity can allow similar exposures to be built with calls or puts, which adds ambiguity to a label such as “buy the structure.” One answer offers a quantity-sign convention: when buying a complex order, positive quantities represent buys and negative quantities sells; selling reverses that mapping. The discussion does not specify a universal matching rule or address other system conventions, so implementations should define and consistently apply their own representation.
Key ideas
- The overall side of a multi-leg order depends on the strategy formed by its individual legs.
- A leg list alone may not identify a familiar structure or its conventional direction.
- Put-call parity can allow related structures to be expressed using calls or puts.
- Communicating each leg and its side helps prevent ambiguity between counterparties.
- A quantity-sign convention can represent leg direction, but its mapping must be explicit.
Tags
Full text
# What is most reasonable approach to determine side of a multi-leg options order? # What is most reasonable approach to determine side of a multi-leg options order? Say, 4-legged multi-leg options order with below leg ``` Order Qty - 100 - Buy 1 Option1 IBM 35 call 20160925 - Sell 2 Option2 IBM 25 put 20160827 - Buy 3 Option3 IBM 35 call 20150620 - Sell 4 IBM stock leg ``` What would be the side of the entire complex options order above? Because another order of same legs can come with inverted sides later, which can trade with first order? For this purpose, I need to determine side based on some approach, so I can Buy/Sell side in each case. What exactly is buying/selling above 4-legged(with one stock leg) mean and how to determine side in the system so as to match the identical vs inverted(opposite sides on legs) orders? ## Answer by Matt Wolf (score 3, accepted) https://quant.stackexchange.com/a/9177 It depends on the exact structure. E.g., a butterfly can be bought or sold and every market participant understands which individual options are bought or sold given knowledge of the agreed spot level and distance of the wing from spot in regards to agreed strikes. Please note that a butterfly can be structured as a combination of calls but also through puts due to the put-call parity argument that generally holds. I am saying this because just buying or selling "a structure" will introduce lots of ambiguity. The above is just an example (3-legged), so an accurate answer cannot be given for the information you provided. Your 4-legged structure can turn out to be several different structures. But I recommend you always communicate the actual legs even if you trade an option structure, most every dealer trading option structures will include the actual legs and their sides to avoid confusion. ## Answer by onlyvix.blogspot.com (score 0) https://quant.stackexchange.com/a/9224 I am a little confused about the question, but if I understand correctly, the convention is that if you BUY the complex order then positive qty is a buy, negative qty is a sell. If you're selling the order then positive qty is a sell, negative qty is a buy.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.