AMC ENTERTAINMENT: Risk-Free Trading (UPDATE)

Monkeys, Drawdowns, Peanuts?

Executive Summary

• When you monkey around with trade size.

• Four is close to risk-free; three is not!

• The infinity trade is coming back to earth.

1. Recap Situation

You may have noticed little activity at the Doze lately. The reason is simple: we have been busy investigating and dealing with arguably one of the most extreme events in American-style options trading. The experience taught us a lot and was humbling, to say the least, mainly because we had structured our products to be risk-free at maturity and sized them accordingly, namely a bit larger than usual. The last few weeks wouldn’t have been so intense if we had been more prudent. However, the lessons learned from the first real drawdown under pressure are invaluable. We have developed new products, forged new strategies to contain future explosions of implied volatility and option assignment risks, and generated new, improved hedging principles against transient and sudden directional changes in price from trade start to trade ex…