DEFINITION of ‘Short Leg’
Any contract in an option spread in which an individual holds a short position. If a trader has created an option spread by purchasing a put option and selling a call option, the trader’s short position on the call would be considered the short leg.
BREAKING DOWN ‘Short Leg’
Option spreads are positions created by options traders by buying and selling an equal number of option contracts, with differing strikes, on the same underlying security. Option spreads are used to limit overall risk by ensuring that gains and losses are restricted to a range. Additionally, option spreads can serve to bring the costs of options positions down, since traders will collect premiums from contracts in which they short.