Two experiments were conducted to investigate the flexibility of letter-position encoding in word identification during reading. In both experiments, two tasks were used. First, participants’ eye movements were measured as they read sentences containing transposed letter (TL) strings. Second, participants were presented with the TL strings in isolation and were asked to discriminate them from nonwords. In Experiment 1, we manipulated the distance between transposed letters (ligament vs. liagment vs. limagent vs. lieamgnt). Reading/response times increased with the distance between TLs. In Experiment 2, we manipulated whether the TLs were consonants, vowels, or one of each (ssytem vs. faeture vs. fromat). Reading/response times showed that CV transpositions were the most disruptive. In both experiments, response accuracy was particularly poor for words presented in isolation when there was an intervening letter between TLs. These data show that processing across multiple fixations, and the presence of a meaningful sentence context, are important for flexible letter position encoding in lexical identification.