The archived Options 101 articles include my March 26, 2010 article on timing. That article explored a suggestion found in Jeff Augen's The Option Trader's Workbook, combined with information and graphs from Jim Bittman's Trading Options as a Professional. Augen's suggestion was that if a three-standard deviation move delivered profit on your position, you should immediately exit at least enough of the position to pay for the original trade. If the position was close to expiration and the big move was at the open, the profitable position should be exited in its entirety at the open, Augen advised.

Before the markets opened on Tuesday, March 15, 2011, I noted that futures were down well over two percent, some approaching three percent. I remembered Augen's supposition and decided that the markets had delivered the perfect opportunity to test it. I had gone flat in my own trades and had none that needed managing, so I had the perfect opportunity to follow up. I had agreed with Augen's premise that such three-standard-deviation moves were rare. Moreover, I know how volatilities can be pumped up at the open, inflating options prices. This inflation in volatilities can occur even with a sudden move to the upside, although that tends to deflate rather quickly. As I've observed markets through the years, I've noted that even if prices move further in the same direction after the dust has settled, options prices don't always keep inflating unless following moves are sudden, too.

Therefore, two factors might be working against the trader who had profit at the open and hoped to make more. The rarity of that big move argues that it might be overdone over the short term and might be at least partially reversed. The pumping up of volatilities at the open means that the best prices might be obtained at the open, even if the move continues in the desired direction.

The open that day gapped indices lower, and the SPX, at least, dropped about 2.8 standard deviations within the first 30 minutes. That's not 3 standard deviations, of course, but it's close enough for our purposes. I tracked prices for four options trades: an SPX APR11 1250 put, an SPX MAY11 1250 put, an SPX MAY11 1100/1100 put spread, and an IWM APR/MAY 78 put calendar. Unfortunately, I forgot about Augen's heightened urging to take profit in about-to-expire options and neglected to track any MAR11 positions.

The IWM APR/MAY 78 put calendar was priced at $1.18 one minute after the open, and had dropped to $1.16 two minutes after the open. Thirty minutes into the day, it was priced at $1.16, and four hours into the day, it was priced at $1.16. At 2:07 pm CST, it was vacillating between $1.15 and $1.16. A few minutes later, it was climbing again, and I did see it reach a price of $1.21 before settling back to $1.15 by 2:41 pm CST. Because calendars involve implied volatilities on options on two different expiration periods, they can show some anomalies at times. This is one reason that, if you're not under pressure to act quickly due to trade-related reasons, you might consider attempting your first order to buy a calendar below the mark, giving it a couple of minutes to see if it will fill before starting to walk your offer up higher. Your first order to sell a calendar might be a bit above the mark, to see it if fills before walking the your order lower.

The SPX MAY 1100/1110 put spread was priced at $0.25 one minute after the open, probably not an executable price, but rather an anomaly. Two minutes after the open, it was priced at $1.00, the same price shown for the mark 30 minutes after the open. Four hours later, the spread had widened to $1.05, but at 2:10 pm CST, it had narrowed again to $0.85, the same as its mark value from the close the previous day.

Happy was the options trader who had bought the SPX APR11 1250 put at the close on Monday, March 14, for anywhere near the mark of $16.15. One minute after the open on March 15, the mark was $28.95. Two minutes into the trading day, it was $29.20. However, although the SPX continued dropping most of that first 30 minutes and was still near the low of the day as that first 30 minutes of trading ended, the mark had dropped to $27.25 at the end of the first 30 minutes. Four hours into the trading day, as the SPX bounced, the mark had dropped to $23.15. At 2:14 pm EST, it was $20.30, a significantly lower value than its value at the open.

The trader who bought the SPX MAY11 1250 put at the close on Monday, March 14 anywhere near its mark of $28.95 was happy, too. One and two minutes into the trading day on March 15, the mark was $43.15 and $43.95, respectively. Thirty minutes later, the price had dropped significantly, to $40.20, with damage continuing over the first four hours of trading, sinking the price to $37.30. At 2:17 pm CST, the mark was $33.65.

Some of those SPX prices could be anomalies as prices can be distorted in OTM options on the SPX. Unlike some of those anomalies with calendars that sometimes do represent executable prices, we can never expect some of these anomalies to represent executable prices on single SPX options or spread prices. I guess they might be a times, but not as often as a calendar price might be. And, although in some market conditions, we can find fills for these orders at the mark for the SPX, we can't expect that our orders will be filled at the mark, particularly in a fast-moving market. However, we have to have some means of comparison as the day evolved, and the mark is one measure. The idea remains clear: those in straight directional trades that benefited from the big drop at the open would likely have been better off selling those options and collecting profit fairly near the open, as price was still dropping. By the time prices had dropped to what was to be their lows of the day, put prices were already deflating. For those who intend to be in a short-duration trade of a day or two, the message seems fairly clear. Although in a flash crash type situation, the trader might have benefited from staying in the trade, Augen's caution relates to what typically happens when underlyings open down that far. I don't think it has to be a three-standard deviation move, either. I have seen any gap down show the same characteristics, so you have to think what you're risking by staying in for the possibility that you'll make a little bit more money while risking the gains you have. Hence, Augen's suggestion was that you sell at least enough to pay for the original trade. If you can't do that with these pure put and call positions because you have only one contract, then I'd strongly consider collecting that profit or else keeping a tight watch and selling if the profit drops below some predetermined percentage of the profit you had at the open.

For the put calendar trader, the decision becomes a little more complicated because we're dealing with volatility changes occurring over options in two different months. The easy statement is that expansions in volatility tend to help calendars--while price action may or may not, depending on where the deltas are aligned--but there's a more complicated reasoning, too. That improvement theoretically attributed to the calendar depends on the belief that the downturn will continue. If the belief is that it's short-term only, the volatilities may expand in the nearer-term sold option but stay relatively stable in the longer-term long option, so that the short-term one's gain, hurting the trade, is not offset by any gains in the longer-term long option. Prices can jump around a bit as the volatility relationship between the options changes, and that may have been happening for a few minutes when the mark on that calendar jumped up to $1.21, as I noted earlier. Ultimately, however, the calendar's profit or loss will depend on where price is as expiration approaches. If the drop in prices that morning had delivered the calendar trader with the target profit, that trader would probably also do well to think about the uncertainty about what will happen next. If the expanding volatilities mean that markets are due for further sharp declines, the price movement will ultimately hurt the calendar if it extends too far. If the rarity of that sharp move means that markets are due for a short-term rebound, declining volatilities might hurt the price.

Some of the same arguments can be extended to the SPX put credit spread that benefited from the drop. The buyer of the SPX MAY 11 1100/1110 should have had a profit target in mind when the spread was purchased. Within a couple of minutes of the opening, that spread's mark had moved 17.64 percent above the previous day's close, and above any high I'd noticed on that spread over the previous few days, when I had happened to be watching it. Of course, the maximum gain for the spread would occur if the SPX dropped to or below 1100 before MAY expiration, something that might or might not occur. While some debit spread traders do hold on into expiration, others tend to have smaller profit targets. While a debit spread such as this is somewhat cushioned against changing volatilities as when compared to a single long put, it is not totally cushioned against a shift to lower volatilities and it's certainly not cushioned against rebounding prices.

However, there's a reason I saved that SPX spread for last. What if that weren't a debit spread but instead was a credit spread, with the SPX MAY11 1110 being sold and the SPX MAY11 1100 being bought? That spread would suffer that same theoretical 17.64 percent change, but it would represent a loss. Does Augen's advice mean that maybe it's okay for a trader with a suffering credit spread to hold onto the trade, with Augen's blessing? That's a harder one, isn't it? I tend to want to let the first 30 minutes to an hour play out, if I can, until volatilities settle down. Even if I elect to exit the trade for a loss, I can often exit at a loss lower than I would have had at the open. Not always. That "if I can" wait is predicated on whether my pre-planned maximum loss has been hit and many other factors. If my pre-planned maximum loss has been hit, I'm not going to give the losses much chance to grow. If that's a multi-contract position, I might consider buying back some of the shorts, enough to flatten the loss curve, or I might buy a put in a further-out month. If market makers are filling spread orders, I might buy back some of my credit spreads to cut down on the margin in the trade or I could place a debit spread in front of my credit spread.

There's no one right or wrong answer for this. Such gaps in the morning can bring a position well past the maximum planned loss at the open, and the decisions become even tougher. You kind of have to know yourself to know what's best for you in that situation. Is this a tiny trade that's only a small portion of your portfolio? Is it a huge trade, so that you were overextended in the first place? Can you afford mentally and financially to take a deep breath and see if volatilities settle out a bit? If the loss notches up even one more dollar, are you likely to freeze in horror and be unable to exit the trade, letting losses grow and grow if the move should accelerate?

What if these positions hadn't been meant to be short-term ones, but longer-term ones? On Friday, March 18, I looked at the values again. The SPX MAY11 1110/1100 put spread was theoretically at a mark of $0.70 at the first thirty minutes of trading drew to a close, bad for the debit-spread holder but a sigh of relief for the credit spread seller. The SPX APR11 1250 put had a mark of $17.30, and the May version, $31.00. The trader who had held onto those puts, thinking that the markets were definitely heading lower would be doing the coulda-shoulda-woulda dance. The IWM APR/May 78 put calendar was theoretically worth $1.18, so the trader had held through several more days with all the attendant angst to have prices about the same place.

I have a caveat to the discussion here. If that calendar were not yet even at a third of the way to my profit target, but prices were under the expiration chart's tent-like shape, I wouldn't be exiting at the open. The trade would still be working, just needing theta to work its magic. I would be aware that something was afoot in the markets, however, and be especially vigilant about watching the delta-related risks in that calendar with prices showing so much volatility. If that SPX credit spread were part of an iron condor, matched on the other side by a call credit spread that may or may not be showing some profit, I wouldn't necessarily be exiting the credit spread, either unless it had reached my adjustment point. However, if in either of these two situations, the calendar or the iron condor had reached even half my profit target, I would closely examine whether I wanted to take off half the position to lower risks in such a volatile market. In fact, I typically want a conservative 7 percent of the margin requirement for my profit on iron condors, and I had closed out my APR position a week before this eventful day under discussion in this article for not quite 5 percent because of the volatile price action over the last few weeks. I had cut my profit target because of the way markets were acting.

Although I know it's not likely, it's my true wish that none of our subscribers were hurt by the price action on March 15, and that all were making decisions instead about whether to rake in profits or not.