70x on a 3-month option I didn't buy
The semis ETF rallied about 80% off the lows over a few months. Most people remember that move.
The bit most people didn't see is what 40% out-of-the-money 3-month calls were worth at the start of it.
Two dollars.
By the end of the move, those same options were worth $140.
That's 70x on a three-month option. Mid-dated. Defined-risk. Held for a couple of months without watching the screen every minute.
I didn't buy them.
They looked expensive on my vol screeners. Every reasonable framework I had said those options were overpriced lottery tickets. Way out of the money, decent time to expiry, low intrinsic chance of finishing in the money. The probability math said they were dead premium.
The math was right. The framework was sound. And the trade was a 70x.
The lesson I take from this:
Consider a small allocation to way-out-of-the-money mid-dated tails even when the framework tells me they're dead premium. Keep it as a small tail allocation. Sized so a zero return doesn't hurt and a 70x changes the year.
In this market, 1-2 month moves can surprise you in ways no framework prices in. The way-out-of-the-money tail is the convex piece that covers you for the regime change the rest of your book can't catch.
Imran
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