Let's look at two snapshots of my live trade the morning of Tuesday, October 14, with the snapshots taken moments apart.

First Snapshot, Graph by OptionNet Explorer, RUT at 1061.60:

To summarize this first snapshot, this moment shows an unrealized loss at $924 or four percent of the maximum margin yet in the trade. For those not familiar with the Greeks of option pricing, the slope of the light blue "today" line seems to indicate that the trade's PnL will improve slightly if the RUT moves a little higher and will slump a bit more if the RUT moves lower. For those familiar with the Greeks of option pricing, delta is +11.42, which tells us that if all other inputs remain the same, we can expect the loss to lessen about $11.42 for each point the RUT moves higher, at least over a short distance. The delta suggests that we can expect the loss to grow by about $11.42 for each point the RUT moves lower, given the same strictures about all other inputs remaining the same.

Those traders who know about the inputs into option pricing would notice that vega is -278.88, indicating that any rise in implied volatilities that would likely accompany a drop in price would worsen the loss. Note: Newbies to option trading can search the archives for Option 101 articles on the various Greeks of option trading for more information. Vega tells us how much the PnL would be hurt or helped by a change in implied volatilities. A negative vega tells us that it will be hurt by a rise in implied volatilities.

Between the time the first graph was snapped and the second one could be snapped, the RUT dropped just a little more than a point. This happened within about a minute of the time the first chart was snapped. Market participants were nervous after days of price drops. We can reason that implied volatilities perhaps did rise when price dropped a little. Before looking at the snapshot of the graph taken about a minute after the first snapshot, we can postulate that the unrealized loss would be deeper than seen in the first graph. Both the known drop in the price and the presumed rise in implied volatilities would theoretically be working against the trade. Let's look.

Second Snapshot, Graph by OptionNet Explorer, RUT at 1060.31:

Oops. It's not worse. What's going on?

First, all of this was occurring about 55 minutes after the market opened. This was still within the time period that some seasoned options traders call "amateur hour." Seasoned traders expect lots of volatility or changeability in pricing during this time period. Given the sharp downturns that had been seen leading into this morning, some traders might have received margin calls overnight and were forced to sell holdings early that morning before their brokerages decided what to sell. Some traders might have feared a repeat of the previous morning's actions, when an early rally was sold. They might have jumped in to buy puts any time there was the slightest hesitation. Some traders might have been sure the downturns were over and wanted to catch a ride to the upside. All these forces were being sorted out early that morning.

Such action would likely have changed the options skew. In other words, some participants who feared a downturn might have bought puts, often out-of-the-money ones, or put debit spreads. Those who feared a sharp upturn might have been buying calls or call debit spreads. Some strikes might have seen more demand than others. The whole supply/demand thing kicks in, driving up the extrinsic value in those particular options. So, we can see some wonky pricing.

What do you do if our "unrealized" profit or loss may not be real, either during amateur hour or other times? First, the happy case. If you've got a trade that might be close to hitting its profit target, absolutely throw out a close order for your profit target. Take that action even if you think it's unlikely you'll get a fill. You might get a happy surprise when your trade is filled during high-volume times with wonky pricing.

When the iron condor was my preferred trade, I liked to buy-to-close each side's credit spreads when they narrowed to $0.20. As soon as my trade entry was filled, I placed GTC orders to buy-to-close them for $0.20. Sometimes they filled when it seemed impossible that they would, even when I never saw the prices narrow enough that they should have filled. It's certainly worth a try at taking advantage of early morning volatility and wonky pricing in such circumstances.

However, what about the unhappy case when you're seeing an unrealized loss during a period of extreme volatility or during amateur hour? That's tougher, isn't it? If your trade is well positioned and not at your planned maximum loss, you may not want to do anything under such conditions. The morning in question, I did nothing to hedge my trade. What was I going to do, even if I had panicked and wanted to do something? I did not know the ultimate direction of the RUT that day. The delta in my trade was relatively flat, so there was no need for delta hedging.

I could have thrown on some kind of positive vega trade to ameliorate any problems with rising implied volatilities. However, I would have taken such measures only if I had been relatively sure that implied volatilities were going to keep rising and if I had any luck with such trades, which I don't. Calendars, for example, are positive-vega trades, and experienced calendar traders sometimes use them to hedge their iron condors or butterflies. However, it's a dangerous and panicked decision to employ an unfamiliar technique in such situations. In my case, calendars aren't unfamiliar strategies: I just don't do well with them. Why would I enter a trade I know I don't manage well, even if it supposedly would help hedge against a big rise in implied volatilities?

The first concern, then, is that you not panic when you see pricing that may be real only temporarily and may normalize later. If your trade is well situated and not at an adjustment point, your best bet may be to set an alert that would trigger when your trade is at an adjustment and then walk away. Obsessing with each little jot or big jolt is not conducive to making calm and reasoned decisions. Do not leave the trade alone, however. Set those alerts. If you are already undone emotionally, also set conditional trades to trigger at adjustment points you've identified.

What if the trade was well situated but you were at your planned maximum loss? Worse, what if the trade wasn't well situated within the profit area and you were at your planned maximum loss? What if, moreover, pricing continued to be so volatile that you weren't sure how pricing would change while you were in the middle of closing the trade? That's tougher, much tougher. Even seasoned traders run up against these situations from time to time.

You can probably assume that once prices and volatilities settle down a bit, your loss will not be as steep. However, you cannot assume that prices or volatilities will settle down before the losses steepen even further and your get-me-out-at-any-price point of maximum pain is reached. If your trade is positioned badly and at or beyond maximum loss, you really don't have much choice. You have to exit unless you're making a dangerous and on-the-fly decision to abandon your trading plan. You want to exit in the sanest way possible. If your trade is well situated and you make the choice to stay in a trade because you think pricing will normalize or if you are waiting so that you can manage the sanest exit possible, you may find yourself instead exiting when the pain gets very much worse, for a much less favorable exit.

I know. That's not what you want to hear, is it? I have no magic answers. My choice, once my maximum loss has been hit, is to exit. That's true even if I'm relatively certain that I could adjust and ride the trade longer, until matters settle down, and hold on until the trade at least breaks even. For learning purposes, I always follow my losing trades as if I hadn't closed them, and almost always I could have adjusted and then ridden the trade until it was at least close to the breakeven point. That's been true of the butterfly trades, but not of the traditional iron condor trades. There's just not enough premium in an iron condor to adjust too many times. Adjust too many times and they're deep under water with no possibility of profit or even of much amelioration of the losses.

Still, even though I trade butterflies, I close out once my maximum loss has been reached. Why? Remember that while those unrealized losses may not seem real, they are for the moment. If you have to make big adjustments under such conditions, you're going to have to lock in realized losses. They're transformed into real or actual losses that now must be earned back.

What if, after locking in and realizing those losses during adjustments, pricing doesn't normalize and the underlying just keeps moving in the wrong direction? Eventually, you'll run up against a case in which there's no further choice, especially if you've held onto the trade close to expiration. You have to exit and lock in those losses, now much bigger than your planned maximum loss. It's that one errant time when it doesn't work out well to adjust and keep following the trade that wipes out traders' accounts and their confidence in themselves as traders. It's that one errant "shouldn't have happened" or "happens once in a lifetime" trade that wipes away months and years of profits. It's that "it has to turn around" trade that rips through IRA's and life's savings. It stinks to wake up one morning with my previously well-centered and balanced trade suddenly not only hitting but beyond max loss, but it doesn't hurt as much as the losses that happened the two times I thought I could keep adjusting, earlier in my trading career. I can't trust the markets. I can trust myself.

However, there's one further complication, even if the market has delivered a stinker of a loss one morning and it's your practice just to exit when that happens. Under conditions of extreme volatility, it's far from certain that you even could close all the components of a complex trade. People complain about market makers and entities such as the SPX with options still traded under a hybrid system, but market makers were required to make a market. We no longer have the same assurance that there will be anyone around to make a market for us. Stories--perhaps rumors and perhaps not--have circulated that on the late afternoon of Monday, October 13, those high-frequency traders who claim they provide liquidity stepped away when big sell orders came through.

Is there a way that you can stabilize your position enough that further losses won't accrue if you have elected to exit your trade and find that you can't get fills? Can you buy in a sold call or put if you can't close your entire 10-contract credit spread that's now threatened? If you can't move the put credit spreads lower in your 20-contract iron butterfly as prices push toward your adjustment level, can you buy in one of those puts? If you're an experienced futures trader--and only if you're an experienced futures trader--can you hedge with a futures' trade? Perhaps none of these tactics is your preferred or best choice under normal circumstances. These sort of stop-gap measures certainly offer risks of their own. Unless you're a prescient directional trader who is always right--and why did you get into trouble if you were--you're almost certainly going to pay a price for such extreme measures.

To summarize, if prices have gone wonky and you have a sudden unrealized loss that wasn't there moment ago, take a breath and evaluate. If your trade is well situated and your profit-and-loss line relative flat, it may be best to walk away from the screen after setting some alerts that would call you back to the trading screen, if needed. Conditional orders may be set if you find you're already too upset to make calm and reasoned decisions if they become necessary.

If your maximum planned loss has been hit due to the sudden wonky pricing, but price is still well situated under your expiration profit-and-loss shape, you can be relatively sure that it's been hit by volatility changes that may or may not resolve. If you're an experienced trader and if your trade allows for adjustments that still maintain profit potential, the choice is yours as to what you do. I don't give myself any leeway in that case any longer. Unless the pricing resolves very quickly, I still exit. Any adjustments I was forced to make when prices are wonky will lock in realized losses. That will make my loss even deeper if the crazy action continues and I'm forced to exit after all.

If your trade is not well situated and your maximum loss has been hit, well . . . your choice is both harder and easier. It's easier because you know it's time to just exit. It may be harder because the exit process may be more difficult. Before this situation arises, practice some what-if scenarios. What could you do to stabilize your trade if you can't get fills to exit the whole thing? In what order would you exit the components if you could get fills?

Once you're armed with this information, you can relax. Know that you will be faced with some of these situations during your trading career. Know that there's no shame in the market delivering a difficult decision to you one fine morning. You are going to experience losses. Keeping those losses manageable so that you can make them up in a reasonable amount of time is your job. Not damaging your confidence in yourself as a trader is an even more important job.

As the rest of the week progressed, I was watching, of course, and adjusting as needed. My trade has managed fine so far, and maximum loss has not been hit. By Friday's close, the unrealized loss was theoretically less than $200, but who knows what will happen next week. Would I have done the woulda/coulda/shoulda thing if my max loss had been hit on Tuesday and I had exited, then followed my trade through as if it hadn't been exited for learning purposes? No, I really wouldn't have. I know that trusting myself to exit when I have to exit is the most important trading skill I have.

Linda Piazza