As stocks break their recent losing streak on Wednesday, one trader appears to be making a big bet that fresh all-time highs are around the corner.
Shortly after the market opened, one trader bought 80,000 February 215-strike calls on the S&P 500 ETF (SPY) for 23 cents per share. In total, the trade (which was executed in a few separate blocks) cost $1.84 million in options premium.
Since a call grants its owner the right (but not the obligation) to buy the underlying asset for a certain price at a certain time, this call option allows the trader to buy the SPY for $215 on Friday, Feb. 20. Profits come shortly above that, at $215.23, because the trader has to make back the premium paid for the call option itself. That would roughly correspond to a 138-point rise for the S&P 500 itself from Wednesday's open, easily making for a fresh record high.
The low cost of this option relative to the price of the underlying ETF (which opened Wednesday at $201.42) gives the trade an interestingly asymmetrical risk-reward relationship. In the scenario in which the SPY doesn't rise the requisite 7 percent from Wednesday's open, or even falls dramatically, the trader will lose only the $1.84 million laid out. However, if the S&P rises, for instance, 10 percent in a month and a half, the trader will make $50 million, for a 2,700 percent return.