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Behind the wild bet on this chopped stock

Lumber Liquidators has already lost half of its value this year. But one big options trader needs the stock to keep getting pummeled in order for an outlandish bet to make them money.

In one of Tuesday's biggest trades on Lumber Liquidators, a firm bought November 50/65 strangles for $4.10. A strangle is a strategy that profits only if the underlying stock makes a big move in either direction. It consists of a purchase of an upside call option and a downside put option. In this case, by buying the November 65-strike calls and selling the November 50-strike puts, the options trader was able to wager that Lumber Liquidation would either fall below $45.90 or rise above $69.10.

In fact, Lumber Liquidators shares did indeed fall sharply to the downside after reporting earnings. After the flooring company's earnings and revenue both came in below expectations, the stock opened Wednesday at $50.01, down 13 percent from Tuesday's close.

Yet since the trade was betting on a gyration of roughly 20 percent in one way or another, the move didn't quite make this trade profitable. While the value of the November 50-put rose in value from $2.20 to $3.00, the value of the November 65-strike call fell from $1.90 to 15 cents, meaning that the whole structure became less valuable.

On the bright side, with another month until the November expiration, the options trader still has time to cash in. If the stock moves another 8 percent to the downside, this trade will become a winner.

Read More After October dip, stocks may be ready for a rip

And in fact, if the trade was a hedge against a short position, the drop in the stock helped the firm more than the decline in the value of the options hurt.

Mike Khouw of Dash Financial conjectures that that's just what happened. A firm may have put this trade on as a way to hedge against a stock surge on earnings—while also finding a way to express a belief that the shares will go even lower.

"I think this was a risk mitigation trade against a short position going into a big catalyst," he said Wednesday. He pointed out that with the stock offering full-year guidance of $2.38 to $2.52, shares were still trading at more than 20 times projected 2014 earnings, a multiple that continues to looks rich.

So even after a 50 percent drop this year, "this story's not over yet," he said.

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

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