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Trader buys 'disaster insurance' on financials

Financials are in focus this week as big banks earnings get underway. But one trader is betting the results could spark a massive selloff in next month.

On Monday, before bank earnings officially kicked off, one trader bet more than $260,000 that the XLF could fall more than 8 percent in just four weeks. Specifically, that trader purchased 24,000 of the August 23-strike puts for 11 cents each. Since buying a put allows a trader to sell a stock, or in this case ETF, at a set price for a given price at a set time, this is a bearish bet the XLF will fall below $22.99 by August expiration.

"This trade actually caused the put to call ratio in the options market surge to about 10 to 1 on Monday," CNBC Contributor and options expert Mike Khouw said Monday on CNBC's "Fast Money."

Khouw characterized the trade as "disaster insurance" for the financials rather than an outright bearish call. "It could be a hedge considering that the financials have generally been in favor heading into this earnings season," he added. The ETF is up more than 2.5 percent in the past 3 months.

JPMorgan and Wells Fargo kicked off the second-quarter reports Tuesday before the opening bell with mixed results: JPMorgan reported an earnings beat on both the top and bottom lines while Wells Fargo matched on EPS but missed on revenue. Other financial institutions expected to report this week include Bank of America on Wednesday and Citigroup and Goldman on Thursday.

Read MoreJPMorgan Chase earnings beat expectations

The XLF was trading slightly higher in early Tuesday trading.

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

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