Shaking the right ratio
Vol #271: April 30th, 2026
Your martini is 30% water.
Whether it’s shaken or stirred (sorry Bond, the latter is technically correct), the process of mixing vodka or gin with the appropriate amount of vermouth introduces a significant amount of H20 into the cocktail. It’d be unpalatable otherwise.
The laws of thermodynamics require that to deliver a chilled beverage, the ice must absorb the room temperature heat of the booze. When vigorously shaken, you introduce more water into the drink because the mix comes into contact with more surface area faster.
Everything from the size of the ice cube, the starting temperature of the mixture, to the proof label will impact the dilution ratio. How you prepare the drink has as many variables as the twist/olive, gin/vodka, dry/dirty parameters that start the mixology.
While everyone is allowed their own preferences, the stirring method is classically preferred because it not only results in a slightly stronger drink, but it yields a more silky texture. Shaking is typically reserved for drinks with fruit juice, or if you need foam like an espresso martini. Micro air bubbles get introduced, and with a clear alcohol the result ends up looking cloudy or bruised.
Ex post rationalists justify Bond’s preferences because at the time Flemming wrote the novels, the quality of spirits was significantly worse. A few extra drops of water helped cut that taste. While he’s been academically classified as a drunk, in the early years he actually preferred champagne to martinis.
It was reading about a swanky new cocktail bar in Midtown that I learned just how much water goes into the martini. Bar Chimera has gone so far as to create their own water recipe for the ice that gets shaken into your drink. Famed for its quality and excellent for pizza and bagels, New York City tap is particularly soft after being rigorously filtered. That compares to mineral waters like Evian with 26mg of magnesium and 80 mg of calcium per liter.
Most cocktail orders are focused on the spirit and the style. Don’t get me started on an extra dirty Grey Goose martini. But the same dilution question holds true whether it’s a vesper, boulevardier, or negroni. Apparently if you’re not paying attention to your ice cubes, you’re missing 30% of the picture.
When I talk to options traders, I see this same ratio in reverse. Everyone wants to talk about the parameters for how to trade a covered call, when 70% of the picture is the choice of underlying. Before you worry about moneyness and expirations, zero in on the stock pick.
You can trade a covered call at any level you like, but most commonly I see these set around the 30 delta level. Very far out of the money and you’re barely diluting one hundred proof. On the other hand, deep in the money overwrites are mixing vermouth into a pint glass of water- a unique preference.
At inception, this is taking away 30% of your underlying exposure. For every dollar the stock goes up, you’re only making 70 cents. And over time that changes. The greeks “go away” at the extremes, and the position at expiration is going to be all or nothing.
Nowhere is this more apparent than the downside. The choice of underlying here matters for a fundamental synthetic reason - a short call + long stock = short put. This synthetic relationship highlights exactly what’s going into your concoction.
There’s a reason junior traders practice synthetics until they become second nature. Every options structure can be reframed by inverting calls, puts, and stock position. Adding a “dividend payment” to your long stock sounds much more attractive than being short puts, until you understand exactly what you’re doing.
The risk in a covered call is mostly to the downside. Of course you’re giving away the right tail too, and equity risk premium is the compensation for bi directional volatility. Despite all that, it’s still hard for me to place positive under performance in the same category as losing money.
Understanding that a call overwrite is the same risk as a short put helps frame this. You get paid a little bit of money, and if stock goes down your delta offset in the call goes away, and you start losing dollar for dollar. That drink gets a lot stiffer with every downtick.
The reason I cringe when someone orders an extra dirty Grey Goose martini is because they have no idea what they’re spending their money on. As any poor college student will tell you, it’s easy to replicate French vodka with the plastic bottle stuff and a Brita filter. While it’s fine to dump olive juice in your cocktail (here you’d shake as I shudder), doing so further masks the illusion that an expensive vodka provides.
This is like calling the return from covered call income. You’re spending your risk budget in a completely incoherent way. The psychological trap of thinking there’s an extra income stream obfuscates a clear set of up and downside risks. The pennies don’t protect the dollars.
If you’re surprised about all the little details that go into a martini, just wait until you dig into the operational complexity of option’s simplest trade.
Long options have their own drags, but a fundamental difference with a short is that you’ve given someone else all the power. They can exercise whenever they want. While there are economically rational and predictable times this happens, it’s still something you have to watch out for, particularly if you made too good of a stock pick and the underlying moves up quickly.
Tax considerations are real too. There’s the qualified covered call rule that technically considers any option written on a stock with less than thirty days to expiry as a functional sale of your stock. While it’s going to be very knotty to prove that, it’s absolutely worth being aware of.
Any time you add another position to the portfolio you’re introducing risk. Besides the directional nuances, there’s the time required to monitor and close the position, and accounting to clean up at the end. No matter how good your picks are, if you can’t maintain a process, it’s not an edge.
I love the covered call for its simplicity. I feel similarly about a martini. But perhaps instead of Churchill’s famous nod in the direction of France for its vermouth, we should be pointed towards Évian-les-Bains.