When I used to day trade, using calls or puts, I didn't think too much about the method I'd use to close out the trade. I put the order in.

When I started trading spreads or verticals, I sometimes had to pay a little more attention to the direction and speed of the market. If I was trying to close out call debit spreads in a down market, I might have to wait for a little bounce before I could get the order to fill at the price I wanted.

When my trades became more complex, I had another worry. I try to keep my risks as balanced as possible so that my underlying, usually the RUT these days, can range fairly far without my incurring too much slippage. I'm usually trading an all-put butterfly, and I use deep ITM IWM calls or sometimes RUT call debit spreads to hedge upside risk. I use IWM calls rather than RUT ones because I want them deep enough in the money to act as stock surrogates. I'm trading small right now as I test this trade, five butterfly contracts for the JUN expiration. I probably won't be able to switch to RUT calls to hedge upside risk until I've sized up to about ten contracts. Although not all butterfly traders do this, I also tend to add out-of-the-money puts as black-swan insurance.

Thursday, May 30, 2012, I had such a many-layered trade. Because of the risk in the market, I had been reducing the size of my trade, locking in small profits along the way. I was down to two butterfly contracts that had since been condorized by moving out some of the puts. The remaining contracts were as follows: +2 810 puts, -2 760 puts, -2 740 puts, and +2 690 puts. In addition, I had two 760/770 RUT call debit spreads, 1 675 RUT put, 1 600 RUT put, and 3 65 IWM calls. Whew!

Here's an approximation of how the position looked, although I had just finished closing down the position when the following picture was snapped. I reset it so I could show you my thinking and strategy as I was closing the trade.

Position as It Existed May 30:

The red tent shape marks the profit-and-loss chart at expiration. The white line marks the T+0 line, the theoretical profit that day. This chart shows that theoretical profit at $1,320, but it excludes commissions. It also excludes slippage that expected to incur. I doubted I'd be able to get all parts off at the mid-price between the bid and ask, for example. When I was actually closing out the trade, that profit number was lower, too, so that I anticipated making a little less than $1,200 by the time I paid commissions and incurred slippage.

How was I going to close this? Certainly not by first closing out all the condorized butterflies or all the iWM long calls at a time. Let's look at what would happen to the expiration chart if I closed out both condorized butterflies at once, for example.

Closing Both Condorized Butterflies at Once:

Whoa! That's not a chart I wanted to have on a down day, not even for the few moments I hoped it would take me to close out the rest of the trade. And what if I couldn't easily close out the rest of the trade?

For those who like to look at the Greeks, you can see that the delta of this trade has jumped to 36.41. It's beta weighted against the RUT, so each point that the RUT dropped, I would theoretically lose $36.41. I don't need to show you what would have happened if I'd instead closed out all three of the IWM 65 calls at once. The chart would have slanted the other way. If the RUT had then bounced hard, the trade would have been in trouble, and I would have incurred much slippage.

First, I closed out one of the call debit spreads. Note that although I'll call these "First Order Completed," "Second Order Completed," etc., the resulting chart will not exactly replicate its appearance after I executed the trade. I am sending my actual orders and their fills to the chart system, but the RUT is moving around while I'm doing so, so the remaining components will be priced differently than they might have been while I was filling my orders.

First Order Completed:

Why did I do this? This flattened the delta more, so that the trade was less, not more, susceptible to a price movement while I got the next trade set up and filled. There was another reason I chose this as a first step: I thought it might be more difficult to sell a call debit spread in a falling market and the liquidity might be less. I wanted to get that trade filled first before I attempted anything else. If I couldn't get that filled advantageously, it might be best to let this well-centered trade run rather than accept too much slippage.

Next I sold one of the IWM 65 calls.

Second Order Completed:

Next, I sold one of the condorized butterflies.

Third Order Completed:

At this point, I looked again at the economic events schedule in order to make up my mind whether I wanted to sell one of my OTM puts to flatten this curve out and wait out all the announcements and developments in this reduced-size position. Because of some appointments that would take me away from the office in a risky environment and I was ready to look for an opportunity to start a JUL trade, I decided to free up funds and close down the remainder of the positions. I just kept taking off pieces, keeping the risk as flat as possible while I did so. I tried to take off the less liquid portions first and then the more liquid ones when possible.

I did suffer a little slippage, but not much. After round-trip commissions, I made $1166, which was 8.9 percent of the maximum margin the trade required at any point while it was open. It was not what I had hoped to make, but I had been in the trade 21 days, and those appointments were going to make it difficult to watch while the economic risks heated up again. Other traders I know were making more money on similar trades, but I like to keep my risk flatter than they do. I'll take less income with less risk. Others will make a different choice.

Whatever your choice during the trade, think about how you're going to close that trade to keep risks as flat as possible while you're doing so. As always, I'm not telling you that my method was the best or the most expert. I'm presenting my thoughts as a learning-as-I-go trader and inviting you to look over my shoulder. You get to see when I've messed up, too. Many will think I messed up to close this trade, for example, since it was well centered and profitable. What can I say except that I may be a different age than you, in a different place financially than you, of a different temperament than you and with different trading experiences. In 2010, my many-years-well-honed plan showed where the paper had worn thin when I experienced a loss bigger than any I thought I would. I'm a trader, so I trade and I accept the risk that goes along with trading. However, I don't take on unnecessary risks, and being away from the office and unable to monitor a trade in the current geopolitical and economic environment seemed an unnecessary risk to me. This trade is small, but I am trying to make decisions as if I had already sized up to the bigger trade I intend to be trading a year from now. Closing out a complex trade ineptly was also a risk I didn't want to take, and I hope this article helps you think about how you'll close yours.