Though crude rallied 5 percent on Wednesday, some traders are expecting more downside ahead.
The price of oil has fallen to half of what it was last summer, and the ETF that seeks to track oil prices (trading under the ticker symbol USO) has plunged along with it. With the most recent short-term pop, a trader placed a large bet that oil will instead see further downside in the next six weeks.
On Wednesday, when options volume was around 50 percent higher than average, one trader bought 66,000 of a 16.50/14.50 May put spread on the USO priced at 50 cents. Since each contract controls 100 shares, the trader risked $3.3 million.
The trade breaks even should the USO decline to $16 per share. However, if the USO sinks to as low as $14.50—or 17.5 percent below Wednesday's closing price—by May 15, the trade could make back nearly $10 million or triple the amount wagered.
A put is a bearish bet that gives the purchaser the right to sell a stock at a given price by a set date.
The trader's decision to put on a spread, where cost of a higher-strike put is offset by selling one with a lower strike, was strategic, according to Dan Nathan, co-founder of RiskReversal.com.
The USO's options' implied volatility, which is used in pricing options, has gone from 12.8 percent last June to nearly 50 percent now.
"As the price of the commodity has gone down, [the options] are expensive," said Nathan. "So to make directional bets, you need to look to offset some of that premium decay."
But while the trader will make the most money should the USO tumble to $14.50, that's a level that the ETF has never seen in its nine years of existence. The closest it came was on March 18, when it traded at $15.61 per share.
Even though the USO is meant to follow oil prices, year-to-date, the ETF is lower by 13.6 percent while WTI crude is 7 percent down.