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Trader bets $5.4 million against Pandora

It's been a wild ride for Pandora investors.

Shares of the streaming giant fell more than 4 percent Tuesday and are now down 25 percent from their 52-week highs. Despite the sharp move, the stock has rallied more than 7 percent in the last week amid favorable developments regarding royalty payments. But some traders are sensing more pain to come, and they are betting aggressively against the stock.

On Monday, when options put volume ran more than 13 times its daily average, one trader bet $5.4 million that Pandora shares will plummet into the end of the year. Specifically, that trader purchased 20,000 of the January 20-strike puts for $2.70 each. Since each contract accounts for 100 shares of stock, and buying a put option allows for a trader to sell a stock at a set price at a given time, this trade is profitable if Pandora falls below $17.30, or roughly 13 percent lower, by January expiration.

"I think the takeaway for investors here is to take a look at how high options premiums are," Mike Khouw said Monday on CNBC's "Fast Money," meaning the price of puts and calls are trading higher than its historical average. "Right now the options market is implying that this stock is going to move 30 percent in either direction between now and January expiration," added the CNBC contributor and founder of Optimize Advisors. That puts the stock near a 52-week high around $26.50 or near a one-year low around $13.50 in less than four months. "It's clear the options market is expecting plenty of movement from this stock," said Khouw.

Volatile moves aren't foreign to the stock, which has surged more than 20 percent in the last three months.

Nonetheless, Wall Street seems appears to believe the move will result higher. Of the 29 analysts that cover the stock, the average price target is $22.08 with an overweight rating, according to FactSet.

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  • Melissa Lee

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

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