A $50 million margin call? I'll short Wall Street.

"Not a single penny of this money should be wasted."

Lu Ze's voice pulled her back from that brief moment of dizziness.

She looked up at Lu Ze, who was standing with his back to the window. Sunlight streamed in from behind him, outlining a sharp silhouette on his shoulder, but his face was shrouded in shadow, making his expression difficult to discern.

"How would you like to deploy it?" Isabella's voice had returned to its professional state—fast, precise, and devoid of unnecessary emotion.

Lu Ze did not answer.

He turned around, walked back to his desk, sat down, picked up the now lukewarm coffee, took a sip, and then looked at her.

"If you had $1.2 billion in cash," he said calmly, as if posing a classroom exercise, "how would you deploy your resources in a financial system that you're certain is rapidly deteriorating?"

Isabella glanced at him.

She knew this wasn't a real test. It was Lu Ze's habit—before making major decisions, he liked to listen to other people's ideas, not to adopt them, but to verify them.

Use her logic to challenge his. See if there's anything he's overlooked.

Isabella sat down in the chair opposite her, placed the tablet on her lap, and thought for about five seconds.

"The first step is the clearest," she began, her speech a beat slower than usual, indicating she was organizing her thoughts in real time. "Add to your CDS position."

Why do you know best?

"Because the trend is the most certain."

Isabella said, "Bear Stearns is dead. Lehman Brothers' CDS spreads have risen from 130 to nearly 250 in the past month. Moody's and S&P are continuously downgrading various MBS and CDOs. Fannie Mae and Freddie Mac's stock prices are collapsing. The credit of the entire financial institution sector is visibly deteriorating."

She pulled up a CDS spread chart on her tablet and showed it to Lu Ze.

"This approach doesn't require betting on whether any particular institution will collapse, nor does it require precise timing. As long as the overall creditworthiness of financial institutions continues to deteriorate—even if it's just a continuation of deterioration, without any actual bankruptcies—CDS spreads will continue to widen."

"And the widening interest rate spread itself generates cash flow for us every day."

She paused for a moment, then added a crucial sentence:

"Furthermore, we've already set up nine ISDA channels. The infrastructure is ready; there's no need for renegotiation or redoing legal documents. All that's needed is an additional transaction confirmation, which Jason can get done within a week."

"How much more?" Lu Ze asked.

Isabella did some mental calculations.

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"The existing $100 million premium has already leveraged approximately $4 billion in notional exposure. The leverage ratio of a CDS depends on the premium level and the contract term."

Based on current Lehman Brothers CDS premiums—approximately 250 basis points—one hundred million US dollars in premium can buy roughly three to four billion US dollars in notional coverage. Other institutions, with slightly lower interest rate spreads, may be able to leverage even higher notional coverage.

She swiped her finger quickly across the tablet, bringing up the current quotes for each channel.

"If we add another 300 to 400 million in royalties, the total nominal exposure could be pushed to between 15 billion and 25 billion."

"But that's pretty much the limit."

She looked up at Lu Ze.

"Going further up the chain, the concentration risk of a single channel increases, and premiums will be driven up by our own purchase volume. The total volume that nine channels can absorb is roughly in this range."

"Four hundred million."

Lu Ze nodded. "Okay."

His tone was devoid of any hesitation, as if he were confirming a conclusion he had already reached.

Isabella noted down the first line on the tablet: CDS addition, 4 million.

She didn't stop. Her brain was already continuing to deduce along the same line of logic.

"Since we've increased our holdings in credit, we should also have corresponding positions in stocks."

she says.

"Deteriorating creditworthiness among financial institutions will ultimately be reflected in their stock prices. We can short financial stocks."

"Individual stocks or sectors?"

Lu Ze asked.

"There's a problem with the individual stock."

Isabella hardly hesitated.

"First, the SEC could introduce restrictions on naked short selling at any time. Since the Bear Stearns collapse, Congress has been pressuring for restrictions on short selling of financial stocks. If a ban is issued, short positions in individual stocks will be frozen."

"Secondly, the liquidity of individual stock options is far inferior to that of ETFs. We need exposure in the billions, which cannot be absorbed by the option chain of a single stock."

"So, XLF."

(XLF, the Financial Select Sector SPDR Fund, specifically tracks the financial sector within the S&P 500 Index)

Lu Ze smiled. He was probably satisfied with her assessment.

"XLF is the mainstay."

He said, "You can buy some individual stock put options as a supplement, but no more than 20% of the total budget."

"clear."

Isabella's strategy: Primarily XLF put options, supplemented by a small amount of financial stock puts.

She looked up, ready to continue the derivation.

CDS is on the credit side. XLF is on the equity side. Both levels cover the same theme—the deterioration of financial institutions.

According to typical hedge fund thinking, this step is about right. Perhaps adding a VIX call option as tail protection would complete the portfolio.

But looking at Lu Ze's expression, she knew he hadn't finished speaking.

"Anything else?" she asked.

Lu Ze did not answer immediately. He stood up and walked to the whiteboard that was covered with various architectural diagrams.

Picking up a black marker, I wrote two lines on the small remaining blank area of ​​the whiteboard:

S&P 500 Put (S&P 500 put option)

WTI Put (Crude Oil Put Option)

Isabella stared at the two lines of text, her fingers stopping moving on the tablet.

She understands the bearish outlook for the S&P 500. The financial sector is a significant component of the S&P 500; if the financial sector collapses, the S&P 500 will naturally follow suit. This is a reasonable extension of logic from the sector to the index.

But is WTI Put – a bearish outlook for crude oil?

She froze for a moment.

They had just made a profit of $1.2 billion from their long positions in crude oil ten days ago. Oil prices are currently around $140. The entire Wall Street community is still debating whether oil prices will surge to $150 or even $200.

Should we short now?

"Crude oil?" For the first time, a hint of uncertainty appeared in Isabella's voice. "We just—"

"You just made money on the long side, so you can't short now?"

Lu Ze turned around, leaned against the whiteboard, and looked at her. There was no sarcasm in his tone, only an extremely calm, almost lecturing statement.

"Isabella, what was the logical thread behind your line of thought, from CDS to financial stocks and then to XLF?"