Just over two months ago, “whiz kid” Leopold Aschenbrenner’s hedge fund Situational Awareness “blew up” via a grossly over-leveraged portfolio of AI stocks. The fund had been borrowing heavily to size up its AI bets, and when the group cracked in July, margin calls forced it to sell the bulk of its stock portfolio to Citadel in a roughly $16 billion block. JPMorgan then cut off its lending relationship with the fund.
So, when CNBC’s David Faber reported in mid-September that Situational Awareness was adding bullish exposure again, but this time via the options market, it lined up with something I’d already been watching build in the options world.
Here is what I mean …
The Call Buying
Faber reported the fund had been adding bullish exposure to AMD, BE, CRWV, SKHY and SNDK. And not surprisingly, I’d seen call buying in nearly all of these names in the prior week, but until then I hadn’t been able to nail down who the buyer was.
Once the report hit, it became somewhat obvious, as you can see via these trades:
- Buyer of 2,000 CoreWeave (CRWV) March 145 Calls for $8.40 – Stock at 89
- Buyer of 1,700 Bloom Energy (BE) November 250 Calls for $25.10 – Stock at 217
- Buyer of 2,000 SK Hynix (SKHY) December 240 Calls for $13.65 – Stock at 186
- Buyer of 1,600 Advanced Micro Devices (AMD) February 650 Calls for $39.65 – Stock at 507
That’s roughly $15 million on these four trades alone … and the fund didn’t slow down.
A week later, traders flagged another roughly $96 million in short-dated SanDisk, Micron, Intel and Marvell calls, all expiring October 2, that many on the Street suspected came from the same desk.
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Leverage the Right Way … Sort Of
I’m encouraged that the fund swapped borrowed money for calls. With options, the most you can lose is the premium paid. No margin calls, and no forced fire sale to Citadel.
That being said, I don’t love how far out-of-the-money so many of these call buys were. Maybe I should let this rocket scientist know that the best way to get leverage to a stock is to buy IN-the-money calls, not OUT-of-the-money calls.
Here’s why. The CRWV March 145 calls need the stock to rally more than 70% just to break even. An in-the-money call, on the other hand, moves closer to dollar for dollar with the stock and doesn’t need a moonshot to pay off. You still get the leverage … without needing to be perfectly right on both direction and timing.
One Bet the Other Way
Finally, one stock we know Situational Awareness had been betting against is Adobe (ADBE), which is assumed to be a company/stock that could be at risk if the AI theme plays out. And right on cue, as the trader was buying pro-AI stocks, a trader stepped in with these puts looking for downside:
- Buyer of 1,500 Adobe (ADBE) June 260 Puts for $39.50 – Stock at 251
Interestingly, this one IS in-the-money, as the 260 strike sits $9 above where the stock was trading. That’s roughly $5.9 million in premium, with a breakeven of 220.50, or about 12% below the stock price.
Lesson Learned
You don’t need a multi-billion-dollar fund to learn from this. Situational Awareness found out the hard way that margin can wipe you out in a matter of weeks. Calls and puts, on the other hand, give you leverage with a hard cap on what you can lose, which is exactly why they’re the foundation of everything we do at Cabot Options Trader.
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