Options Action
Friday 5:30 PM ET, Saturday & Sunday 6:00 AM ET
Options Action

The million-dollar bet on a speedy market rally

Huge bullish bet on the S&P
Huge bullish bet on the S&P

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.

Read More Here's what happens to stocks when oil drops 50%

Traders work on the floor of the New York Stock Exchange.
Getty Images

"Basically, someone's taking a shot here," said options expert Brian Stutland of Equity Armor Investments.

He points out that the S&P 500 fell below its 100-day moving average on Tuesday, and opened just above that smoothing mechanism on Wednesday.

"The last couple of times we've rallied off the 100-day, the rally has been fast and furious," he said. "It kind of makes sense that someone's going to buy some calls to see if that will happen again."

Matt Tuttle, whose Tuttle Tactical Management specializes in tactical ETF-based investment strategies, does believe that the SPY is setting up for a strong bounce off of the lows.

"At some point it's going to be the top, but I don't think we're there yet. We're thinking you'll get yet another V-shaped recovery," he said.

But that doesn't mean Tuttle would jump aboard this trade.

"$215? That's a tough one," he said. "I think we will cross $215 eventually, but I think Feb. 20 is a little too optimistic."

Follow the show on Twitter: @OptionsAction.