GO
Loading...

The million-dollar bet that the S&P will skyrocket

Traders work on the floor of the New York Stock Exchange.
Jin Lee | Bloomberg | Getty Images
Traders work on the floor of the New York Stock Exchange.

Shortly after the market hit the lows of the day on Wednesday, one trader spied an opportunity. And in one huge options trade that caught the eyes of market participants around the globe and appeared to help out stocks in the afternoon, this major player made a wager that the S&P 500 will rise into the end of the year, perhaps getting above 2,050 as soon as October.

In a single combination of purchases and sales of S&P 500 options that occurred at about 12:20 p.m. ET, this trader sold 6,000 December 1,850-strike puts, bought 12,000 October 2,050-strike calls and bought 18,000 December 2,125-strike calls.

Options experts will tell you that this specific kind of trade is called a "ratio calendar risk reversal stupid" (seriously). But the bottom line is that by doing all this fancy footwork, the trader immediately took in a $2.7 million credit, but could make a lot more if the market continues to rise.

For every point that the S&P is above 2,050 at October expiration, the trader will make another $120,000 (given that 12,000 contracts were bought, and S&P options have a 100-times multiplier). And for every point the S&P is above 2,125 on Dec. 19, the trader will make $180,000. That means that if the market closes the year 15 percent higher, for example, this trade will yield some $25 million.

But the trader isn't just expressing an opinion that the market will rise—there is also an expectation that the market is unlikely to fall far.

By selling the December 1,850-strike puts, the trader will effectively be obligated to get long the S&P 500 at that level, no matter how far it falls. That means that if the S&P drops 15 percent into the end of the year, this trader will lose more than $100 million.

Of course, if a firm is absolutely sure that it would be willing to buy the S&P at 1,850 in December even if it is trading below that, then that loss effectively happens only on paper.

Read MoreRon Paul: Stocks are in a bubble and will crash

"This is certainly a big bullish bet on the S&P, and it is a sign that new money is either willing to get long on a 5 percent selloff, or at least participate further on an upside market rally," commented Brian Stutland of the Stutland Volatility Group.

For Jim Iuorio of TJM Institutional Services, the time is right for a trade like this, as it came ahead of Wednesday's Fed decision and Friday's eagerly awaited jobs report.

Read MoreJon Najarian sees unusual activity in Yahoo options

"If we're going to move, we're going to move over these three days," Iuorio told CNBC.com. "And this is a very nonaggressive way to get long the market."

As for its impact on the S&P itself, which appeared to rise a bit as the trade hit, Iuorio said that the trade is roughly equivalent to buying "5,000 of the underlying S&P contract, so about $1 billion worth of stock," which is enough to help out a market dropping on "not much conviction."

—By CNBC's Alex Rosenberg

Watch "Futures Now" Tuesdays and Thursdays at 1 p.m. ET exclusively on FuturesNow.CNBC.com!

Contact Futures Now

  • Showtimes

    Watch Futures Now Tuesdays & Thursdays 1p ET exclusively on cnbc.com!

Sponsor Links

  • CME Group brings buyers and sellers together through its CME Globex electronic trading platform and trading facilities in New York and Chicago.

  • Take your trading to the next level with a platform that lets you trade stocks, options, futures and forex all in one place with no platform or data with no trade minimums. Open an account with TD Ameritrade and get up to $600 cash.