When you're day-trading futures or a long option trade, you base your exit strategy on profit-and-loss numbers and/or expectations about price movement. The trade is exited with a single order. When you're trading a complex options trade, that complexity transfers to exiting procedures. Often, you can't exit with a single order and must think about how to stage your exit.

What do I mean? The most important thought about exiting a complex trade can be demonstrated when thinking about exiting a call debit spread, composed of a long call and a higher strike sold call. Perhaps as time progresses, the long call might be worth $4.40 and the sold call $0.05. Perhaps you're having trouble filling the order as a single order because there's no bid on that cheap sold call. You decide you'll have to split the order up. You're afraid the underlying is about to roll over, so you sell the long call first to capture the most premium.

Or, you attempt to do so. Depending on your permissions, your brokerage may stop you right there, because selling the long calls leaves you with a naked short call. That's something you just don't want to do and may not be allowed to do. If you must split up such an order so that you can even get a fill, buy in your sold option first to avoid risk from a naked sold call. The same holds true of put spreads.

Let's look at an even more complex simulated trade. This simulated trade was set up and adjusted the way I typically set up and adjust my monthly RUT trades, although I typically trade more contracts. Since I elected not to trade a RUT trade in November because of all the political wrangling at the time I usually enter, this is not my actual trade. My actual trade was a small IWM trade.

Theoretical Bearish RUT Butterfly, Hedged with an Extra Armageddon Put and a DITM Long Call at Entry, OptionNet Explorer Chart:

The delta was a mild 3.91. The profit-and-loss (PNL) line shows that the trade was well-hedged both directions for some distance. Hedging still left lots of room for profit.

As this hypothetical trade progressed, the RUT moved higher. By Wednesday, November 6, I had made several simulated adjustments to keep that PNL line relatively flat and keep price mostly inside the butterflies. For example, I had moved two of the original five 1120/1070/1020 butterflies to the 1150/1100/1050 strikes and added and subtracted several call debit spreads along the way. The result was a trade that also included 3 1090/1110 call debit spreads. Below you'll find the resulting PNL chart. By that Wednesday, November 6, it was time for another decision, however.

Risk Profile of Adjusted Theoretical Trade as of November 6, OptionNet Explorer Chart:

The legend on the left side lists all the options positions as of November 6, nine days before expiration.

My personal trading plan involves exiting the trade the week before expiration week. This particular week, the next day was to bring the likely market-moving GDP and the day after that, the almost certainly market-moving non-farm payrolls. In addition, implied volatilities are usually hiked up before such important economic events, and little "time premium" decay occurs in the intervening days. If that trade had been a live trade, I almost certainly would have exited on Wednesday rather than waiting until Friday rather than adjusting to flatten out the deltas a little more ahead of potentially market-moving data. This is true even though the profit shown was slightly less than top end of the $250-300/butterfly contract that is my profit target. In fact, I did exit my little IWM trade that day.

But how would one exit a complex trade such as this? If I wanted to go to some trouble, I could have staged the orders to exit the 1150/1100/1050 and 1120/1070/1020 butterflies, the 1090/1100 call debit spreads, the extra 1020 put, and the DITM 980 call so that all the orders would fire at once. I've never bothered to learn how to do that for this type of trade for reasons that may become clear as the article progresses.

Since the CBOE had taken over the trading of complex RUT options trades, I'd noted that it was sometimes more difficult to get fills on those complex trades. What would happen if the two sets of butterflies and the Armageddon extra put filled, for example, but none of orders to sell the DITM call or the call debit spreads did?

Simulated Trade after Butterflies and Armageddon Put Orders Filled:

Note that the legend on the side now includes the orders to close the positions rather than the resulting position. That's because I didn't "Commit" the discussed trades. I was just trying out the resulting effect on the overall trade.

I would then have a decidedly bullish trade on my hands. What if those butterfly and put orders filled first because the RUT was rolling over hard as the end of day approached, and their mid-prices had jumped, resulting in the quick fills? The calls would have been losing money fast. The profit I thought I had could be decidedly less before I could pull those staged call-related orders and resubmit them at lower prices. I might be left chasing those fills into the close.

What I usually do in such complex trades is to submit them in stages so that the delta stays as flat as possible while I'm getting orders filled. For example, I might place the order to sell-to-close one set of the butterflies and then quickly follow that with an order to close either the DITM call or some or all of the call debit spreads.

Theoretical PNL Chart if the 1150/1100/1050 Flies and Two of the 1090/1100 Call Debit Spreads Are Exited in Quick Succession:

Although the shape of the expiration chart is a bit altered and the RUT's price looks to be on the edge of the expiration graph, we can see from the shape of the PNL line itself that profit will remain rather flat with price movement a short distance either side of the current trade. I would have time to plan the other orders and submit them without fear of suffering great loss if the RUT changed direction.

The delta tells us this, too, because it's a relatively mild -21.75 for this original 5-lot trade. Of course, you might be asking, what would have happened if you'd sent off that butterfly order and it had filled, but the order to close the two call debit spreads didn't? In that case, the absolute value of the delta would have been a little larger than I wanted, +41.20, but it still would not have come near the possible risk if all the fly closing orders had been filled at once.

This way, the trade is kept relatively stable while you're exiting. There's not as much risk from a sudden price movement when you're in the middle of attempting to close the trade. With this trade, composed of so many parts, the trade almost has to be exited this way unless I stage the closing orders to all fire off at once and then they happen to fill in quick succession.

If my trade had been composed of flies all at the same strike and several DITM calls and/or call debit spreads, you'd have to ask yourself which risk is the most troublesome under current market conditions? Is the risk that you might make a mistake when splitting up the orders in order to keep delta even too large a risk? Or is the risk of adverse price movement if you happen to close all the bearish or bullish part of an options trade first, and then are left with a strongly directional trade? Different traders will make different decisions. The same trader might change the approach depending on the market movements or ease of fills on a particular day.

Linda Piazza