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The $5 million bet against the S&P 500

Trader on the floor of the New York Stock Exchange.
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Trader on the floor of the New York Stock Exchange.

In a big trade that caught the interest of the options community on Wednesday, one trader placed a massive bearish bet on the SPDR S&P 500 ETF (ticker symbol: SPY). This $5.4 million trade will only pay off if stocks fall more than 3 percent over the next seven sessions.

At about noon ET, a buyer initiated the purchase of 43,830 weekly 195-strike puts expiring on Jan. 23 for $1.23 per share. Given that each options contract controls 100 shares of the ETF, this trader is laying out $5.39 million in total.

Read MoreKnow your options: The basics of puts and calls

In order for this trader to make money, the SPY would need to fall below $193.77 by a week from Friday, a 3 percent decline. Based on an S&P 500 price of 2,000, that would correspond to a drop of about 62 points for the broad market index.

The trade comes as the CBOE Volatility Index is rising, which tells us that investors are paying a greater premium for protection against downward market moves. On Wednesday, the VIX rose as high as 23.34, a four-week high for the so-called "fear index."

For options trader Brian Stutland of Equity Armor Investments, buying near-term puts makes sense now.

"I definitely see why somebody's going to take a shot at a washout, or at least protect their portfolio over the next few days," he said. "The technical setup looks really bad, and I think you're going to see a further flush before Friday."

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    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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