Ok, let's look at the $'s of this trade in slightly simplified terms.
Assumptions (not exact numbers, but rounded in the ballpark for simple calculations):
1) 100,000 puts shorted at 55 strike
2) 110,000 puts long at 45 strike
3) below 30, all these puts move 1 for 1 with the equity
4) QQQ at 25 when trade entered
If QQQ drops 5 points to 20, he has a profit of 5x(110,000-100,000)x$100/contract = $5 million profit
If he then legs out of all the long puts, he locks in that $5 million profit but now is short 100,000 puts naked and needs to put up more margin for the naked position.
If QQQ then drops 1 more point to 19, he loses 100,000x$100/contract = $10 million
He now has a net loss of $5 million after guessing right that the QQQ would drop 5 points, but guessing wrong on the bottom by 1 point.
When the trade is entered, the risk is limited pretty much to the movement of the "excess" 10,000 contracts. If he legs out completely of the long puts, the risk increases by an order of magnitude to $10 million per point of QQQ movement. Based on the risk and margin requirements, I don't think the trade was entered with the intent of legging out of it, at least not one complete leg at a time.
An interesting twist is rather than closing out the whole position or one whole leg at a time, he could just sell the 10,000 puts and keep the 100,000 puts at both stikes, which would create a bull put spread that would profit if the QQQ moves up, with the max profit having him keep the full credit if the QQQ closes at 55 or higher at expiration. Alternatively, he could sell 20,000 puts, creating a bull put spread (on 90,000 contracts) plus having 10,000 puts naked short, in which case he'd profit even more if the QQQ moves up, though he'd also risk more if the QQQ moves down. With so many contracts, he'd have many ways to exit the trade...
Aloha
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