Episode 3 of Sherlock & Daughter kicks off with Sherlock rescuing Amelia from the police station, where her displeasure with him for deserting her is palpable. Once they arrive at Baker Street, Amelia is adamant about packing her bags and leaving. Sherlock, undeterred, lists his myriad contributions to her well-being and demands an explanation for the mysterious red thread entangled among her possessions. This prompts a flashback to the tragic murder of her mother, during which Amelia reveals she discovered the thread tied to the murder weapon—a knife. Sherlock, observing that her mother's body was already rigid and cold, deduces that she had been killed somewhere between 4 to 8 hours prior to Amelia's discovery. Amelia also mentions the disappearance of several maps from their home, leading Sherlock to hypothesize that the same shadowy organization behind the kidnapping of Watson and Mrs. Hudson is also responsible for her mother's demise.
Sherlock then meticulously outlines their plan of action. He tasks Amelia with visiting Clara, reminding her that their secrets are no longer safe, and also to keep an eye on the upcoming insurance investigator who will soon be probing the Somerset household in America. Meanwhile, Sherlock will devise a discreet method to communicate with Charlie in prison, without drawing public attention. Amelia agrees to these terms, contingent upon Sherlock collaborating with her on the red thread case and bringing her mother's killer to justice.
As Amelia sets out on her mission, she becomes acutely aware of being tailed by a mysterious man. She arrives at the Somerset residence, using the pretext of retrieving Sherlock's horse, and confronts Clara, reminding her that their secrets are now out in the open. Shortly thereafter, the insurance investigator arrives, peppering Clara and her parents with probing questions. He inquiries about how Charlie knew the exact location of the jewels days before the Somerset family even set foot in America. Amelia, who has been allowed to stay, rises to the occasion, confronting the investigator's blunt questioning head-on. As he departs, a hint of admiration for Amelia's spunk is evident, and he offers to mentor her in his trade.
Meanwhile, Sherlock Holmes arrives at the foreboding confines of Newgate Prison, where he encounters the enigmatic Professor James Moriarty. Though confined within the bars of a cell, Sherlock's acute observational skills lead him to conclude that Moriarty is, in fact, living a surprisingly opulent existence behind his prison façade. Unveiling the ominous red thread, Sherlock discloses how the shadowy organization has disrupted Moriarty's ventures, a revelation that convinces the professor to collaborate with him.
With a flick of the toilet chain, Moriarty reveals a concealed doorway, beyond which lies a sumptuous chamber serving as his hidden abode. An alliance is forged, and the two men swap garments, allowing Sherlock to confront Charlie without arousing suspicion beyond prison walls. Disguised as an inmate, Sherlock is escorted to Charlie's cell.
Assuming the guise of a red thread operative, Sherlock accuses Charlie of straying from their agreed-upon course. Charlie confesses that the crucial objective was to procure a set of keys from Paul, Clara's father, and mentions his accomplices, Weams and Maggots, who had abducted Mrs. Hudson and Watson. Sherlock then informs Charlie, perhaps deceitfully to sway his belief, that the hostages and accomplices perished in the coffin factory blaze (though their escape was witnessed, leaving the motive for Sherlock's statement unclear).
Upon returning, Moriarty grants Sherlock his freedom on one condition: to locate and bring back his son, Dan, who was exiled to Australia for theft years ago. Recent reports of an Australian youth in the city have sparked Moriarty's hope, and he tasks Sherlock with this mission. As Moriarty receives a hasty note, urgency propels him to expedite Sherlock's departure. As Sherlock exits, he realizes the grim reason for the haste – Charlie has taken his own life, a crimson thread tightening around his neck.
Elsewhere, Amelia becomes aware of a man trailing her homeward. Despite Sherlock's explicit warning to avoid engagement with any spies or pursuers, she bravely confronts the stalker, grappling him to the ground. However, this act of bravery proves detrimental as the man draws a pistol, training it on her in a climactic scene that concludes Sherlock & Daughter Episode 3.
