The multi-leg cost multiplier

Module 5's structures are built from several options at once - and each option in them is a leg that pays its own commission and its own spread, both ways. This lesson prices that multiplication, because it is where paper-elegant structures become practically expensive.

The multiplication

• Commission per leg: a four-leg structure pays four per-contract commissions on entry and four on exit - eight charges where a single option pays two (lesson 1).
• Spread per leg: each leg crosses its own bid-ask, so the structure pays the spread on every leg, both ways - and if any leg is illiquid, that leg's wide spread is in the total (lesson 2).
• The total against the max profit: a defined-risk structure has a capped maximum profit, and the summed frictions of all its legs come out of that cap - so the costs can be a large fraction of, or even exceed, the best case.

Where elegance meets cost

The defined-risk structures of module 5 look clean on a payoff diagram - a capped loss, a capped gain, a defined range - but each leg is a real trade with real frictions, and the diagram does not show them. A four-leg structure on liquid options is manageable; the same structure on illiquid options can pay so much in summed spreads and commissions that its capped profit is mostly consumed before the underlying moves. The elegance is in the shape; the cost is in the legs; and a reader who prices only the shape has priced half the position.

The pricing discipline

Price every leg: commission per contract per leg, spread per leg at its real width, both entry and exit, summed into the structure's total cost - then measure that total against the structure's maximum profit, not the underlying's price. A structure whose frictions consume most of its capped upside is not the elegant position the diagram suggested; it is an expensive way to express a view the costs have already half-defeated. The multi-leg multiplier is why module 5's structures must be costed leg by leg, and why they belong on liquid options or not at all - the cost discipline that keeps the payoff diagram honest.