Sunday Options School

Let’s deconstruct, for fun and education, AW’s ICE recovery trade. This is why he picked ICE.

but basically, just look for generally uptrending names, and then short some puts into mini dips

My guess is that the mini dip where he sold some puts was at the point marked 1. My guess is that he sold 105 puts. Just to keep the trades concrete, say he started out short 10 July 105 puts. I don’t know and he won’t say.

The “T” on the chart labels the day that ICE fell through the 105 strike like a hot knife through butter. AW was in trouble.

So I ended up covering by turning the put short into a butterfly, going long the 100 strike. That was the mediocre.

Long twice as many 100 puts as he was short 105 sounds good to me. Of course, if this is a butterfly, then he was also short, maybe, the 95 puts. So now our hypothesis is that his position is:

-10 105 P,
+20 100 P and
-10 95 P

And he has turned his profit distribution from this:

To this:

Look at the purple line, since that is where the position is when it is put on. He is working his way to breakeven if ICE keeps falling, but no better than break even. Hence “mediocre”.

Stock kept going lower, so then had my one good idea. Just converted it to long downside gamma by shorting more 105 puts so that I was now short the 105-100 put spread 1:1, and then bought an equal number of 95 puts and a little stock.

So the hypothetical position now looks like:

-20 105 P
+20 100 P
+20 95 P

The position gets to break even at 86. Which is where it closed Friday.

That part worked out well yesterday as the stock imploded. The only thing holding me back was….well, me. I got short and shorter thru 95 and was patient all the way until….the 91’s. Which sounded great at the time, not knowing it would go to the 84’s. By which time I bought more stock and kept the long gamma game going by purchasing some July 85 puts.

Roll it all up and a lot of trouble to pretty much break even, although even sounds good compared to the initial ugliness of my put short. I’m now just long some gamma. For the moment, will probably sell some “wings” (OTM puts and calls) and call it a day.

A good recovery.