[00:00] Neapol, Alsham, Brenner, a 24-year-old with no Wall Street track record, turned $225 million into $45 billion using roughly four times leverage. In just nine days, it unraveled. As AI stocks plunged, margin calls forced liquidation, and Citadel stepped in, buying roughly a $16 billion portfolio at more than a 10% discount.
[00:19] The timing was remarkable. Many of those same names surged 15% to 27% the very next day, and several have continued climbing since. We're seeing a massive move in the markets since as well.
[00:31] S&P has gone out to make fresh all-time highs. We've got FTX at all-time highs. We've got NASDAQ near 30,000 right now. So what really happened? Was this one of the greatest distressed trades ever made, or simply a case of leverage turning a winning long-term thesis into a short-term disaster?
[00:49] Let's talk about it on today's episode of Options Math Check. So lots to unpack here. I think it is, you know, it's an amazing story. And at the end of the day, still a winning story.
[01:03] So can't knock it completely. I think it's always going to come down to how much variance you can withstand. And we will continue to see these stories. It just happens all the time.
[01:16] It doesn't happen all that often, but every single year I feel like there's some fund that gets liquidated or some kind of blowout, whether it's being short in a product that's having a short squeeze.
[01:29] We saw one, I believe, in natural gas a couple years ago, a fund that was short enough for gas. They couldn't hold it. They got forced liquidated. And you just see these massive green bars to the upside, and you're like, well, what is this? similar story to leveraged longs and the inability to withstand margin calls and we talk about this
[01:48] all the time on tasty live you talk about the ability to withstand variance withstand variance you gotta withstand variance gotta keep cash on the side you can't be super over levered because
[02:00] really at the end of the day if you are levered to the point where you can't absorb a 10% sell-off You can't have over 20% soft. And I'm talking like the S&P 500, where you're like, eh, nothing's going to happen to where the S&Ps are going to go down 20%.
[02:15] The S&Ps will go down 20%, again, at some point in the future. I can't tell you when it's going to happen. I can't tell you why it's going to happen. Right now, this is like the most euphoric rally we've seen.
[02:28] You could say a lot of it has to do with the leverage unwind and the fact that the markets are rallying from that point on. But at the end of the day, you have to take the markets for what they are. You have to take them for volatile instruments.
[02:42] Over time, you have an average return in the S&P 500 of 8%-ish. But within each year, you have wars that are announced. You've got the Japanese yen unwind a couple of years ago.
[02:55] You had tariffs And within that 8 average return you had 20 sell 30 sell and then 20 rips 30 rips to the upside So you really want to avoid especially if you trading long positions
[03:11] you have to avoid the inability to hold positions in a long-term way. So even looking at the S&P 500, the E-mini futures, just this year, like, look at this year.
[03:23] This year has been crazy. We started at 7,000. We dropped all the way down to 6,400. That's a 600-point sell-off, almost 10% right there. Then two weeks later, we go from 6,400 all the way up to 7,200 and beyond.
[03:36] We went from 6,400 up to 7,400 in a matter of two months. That's 1,000 points to the upside. So if you're piling shorts into the sell-off thinking we're going to 5,000,
[03:48] you got your face ripped off here to the upside. And same thing here. You thought maybe we were chopping around. there's no way in the beginning of 2026 that we're going to sell off 10%. If you're using too much leverage, you are going to create a scenario where buying power increases,
[04:03] volatility increases, losses are on the table, and that's why trade size is so important. Even over the last four days, maybe you saw this downward trend in the humanities, and you're like, you know what, I like these big red bars, followed by a lack of upside movement.
[04:19] And then, boom, literally in four trading days, we've gone from 7,300 to 7,700 in the S&P 500. And even the bigger gain in the NASDAQ here from 27K to almost 30K, 3,000 points in four trading sessions.
[04:34] Absolutely nuts. So I think it's a little bit of both here when the question is, you know, what was this? Could this have been, you know, resolved differently? Could this have been avoided?
[04:46] at the end of the day if you're trying to turn a couple hundred million dollars into tens of billions of dollars leverage probably is in play especially in the short term so yes and no but i
[04:58] mean really the answer is if you are seeing outside gains in this regard where you're seeing massive gains to the upside when markets are moving up if you're adding leverage or you're not reducing leverage on the way up things can really fall out of bed on the way that they're outside
[05:13] to. So we always have to think, I think that the best way to approach trading these markets, especially with leveraged products like options trades, like we talk about all the time, is realizing that even if you sell an option that has a 70% probability of expiring out of the
[05:30] money, it still has a 30% probability of expiring in the money. And within that 30%, you've got about a 60% chance that that option is tested at some point in time. If you look at the probability of touch that we've done research on where probability of touch is basically twice the
[05:46] in-the-money probability percentage. So 30% of the money or even a 20% in the money or 10% probability in the money still has a sizable probability of being tested at some point in time. So you got to keep that in mind when you trading these things And that why you know trading super small keeping cash on the side is really going to be a good recipe for success in the long term There are times and places to step in with leveraged trades
[06:11] I personally like to do it when we see market downside moves, where you see 10% downside moves in the NASDAQ or the S&Ps. That's what I'm getting in and I'm buying leap options. That's a great example because we know also if markets are starting to sell off,
[06:25] if you fast forward six months, a year, three years, the probability that the market is higher in the S&P 500 and the NASDAQ specifically is pretty high. So you can position yourself to execute that sort of assumption,
[06:37] but you still have to set yourself up for being wrong in even that regard. So always keeping trade size in check, I think, is super important. But the question is here with this math check, too, is, like, where is this market going from here on out?
[06:52] We have crude oil markets crushing down to 75. We're seeing not only the current active price getting crushed from the mid-90s to the mid-70s, but for me, the most important thing to keep an eye on if you're asking yourself,
[07:07] what's the situation overseas and how long is it going to last? Look at the backwardation in these markets. We had a 4 or 5 point backwardation in crude oil. That is now down to a point between the 13-day and the 44-day and a point between the 44 and 72-day.
[07:22] So still backward-aided, but we've been backward-aided for quite some time in crude oil markets. This is the first time we've seen a drop below 70 here in the March, April, and May cycles of 2027. So lower prices there, but I think when you think of all these things that are kind of overlapping at the same time,
[07:39] the leverage unwind followed by the market ripping higher. You had Amazon, Apple, Microsoft, and Meta earnings. Half of them were to the downside, half of them were to the upside, But the ones that were to the downside, Meta and Apple, Meta specifically, completely reversed its move.
[07:56] We dropped 100 points almost after earnings, and we are right back to where we started. Microsoft ripping to new highs up at 496, almost back to 500. This is up 100 points in four days.
[08:08] So there's just so many things that are overlapping here. And even when you look at the divergence that we've seen, we've been seeing chip stocks moving to the upside, software stocks moving to the downside, or vice versa. You've seen software stocks moving to the downside,
[08:22] chip stocks moving to the upside. Today, right now, we're seeing everything just rip higher. Like an intraday move of 1,000 points in the NASDAQ is pretty wild here. And this is the second day in a row where we've seen the E-minis up over 100 points intraday.
[08:35] Volatility is getting crushed. So it's just like a magnitude of things, a multitude of things happening all at once, which I think is really creating this upside movement here in the markets. But as you might imagine, if we were to look at the probabilities of reaching certain levels in the E-minis at the end of the year,
[08:53] let's go down to the December 31st cycle all the way at the end of the year. And let just see where the E futures have the probabilities at So let flip this over to Delta We can look at in the money probability too all one in the same here But yeah we looking at an expectation in this
[09:12] cycle now, plus or minus 500 points through the end of the year. We've got about half the year left just under that. And that brings us up to 84, 8,500. So well above the current target. I know at the height of the war, some people were saying, we're going to see this market crash,
[09:27] and then we're going to see it rip back to 7,700. We're above 7,700 now. So the next call that we're seeing is 8,100. 8,100 is actually within the probabilistic range of outcomes here in e-mini futures,
[09:42] and same with SPX. SPX, it's going to be a similar reading here, but looking at the end of the year, 8,000, 8,100, well within the implied range, 40% chance that we get there,
[09:54] and we are above there by the expiration in December. And all the way to the upside here, like where is our one standard deviation mark? 8,700, another 1,000 points on the upside. Might seem crazy, but if the market continues the way it is now,
[10:09] where it seems like the overseas activity that created the backwardation in the crude oil markets is moving to the wayside. I think another thing that's interesting, outside of the tech stocks and the MAG-7 stocks
[10:22] that have really caught up is just the fact that we are now seeing an interesting change in interest rate probabilities. So if you go check out the CME FedWatch tool, we are seeing a big rise in the probability
[10:36] of staying at the same interest rate that we have now. So that is a stark difference from a couple days ago when we had more uncertainty in these global markets, we had more uncertainty across the board. you had about a 60% probability that we would get a 25 base point hike in September
[10:53] and a 40% probability that we wouldn't. And now those are kind of flipping. We're kind of at a 50-50 here. So check that out. I think that's really interesting too. I think if we don't hike race again,
[11:06] that might be one of those reasons or catalysts to why you're seeing the market move to the upside right now. But all that to say, let me know what you think in the comments below. and always join us on the YouTube chat if you can.
[11:20] We're over streaming live there on the JC Live channel. But yeah, E-mini is up 150 right now. NASDAQ about to tick 1,000. Can we do it live? I don't think we can. But crazy day all across the board.
[11:33] But yeah, I think really markets ripping higher, volatility getting crushed, crude oil markets getting crushed, backwardation flat now. All these things are pointing to up and to the right. Unless we have another catalyst
[11:45] or something that comes into the market and introduces stress. But for now, it is up and to the right, or at least it has been over the last couple of days, and it's been a wild one. Hopefully, you'll be able to get some nice trades in there.
[11:57] But that's it for me. We'll see you on the next episode of Options Math Check.