As traders freak out over junk, one takes advantage

The recent plunge in high-yield bonds has dramatically increased the perceived risk around products like the iShares high yield corporate bond ETF (HYG). And it appears that some traders are trying to take advantage of the market's skiddishness.

On Wednesday morning, one trader made a large options trade that allows access to profits if the HYG rises byMarch, but puts that trader's money on the line if the ETF falls further.

Of course, this is a similar profit/loss relationship to simply buying the HYG. But what's impressive is how little the HYG has to rise in order for this options trade to pay off, and how much it has to fall for the trader to lose money.

In the morning's biggest trade on the HYG, a trader appeared to buy 12,992 82-strike call contracts expiring in March for $1.35 per share (or $135 per contract), and simultaneously sell 12,992 75-strike put contracts expiring in March for $1.32 per share.

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This trade, which was effectively put on for free, will yield profits if the (HYG) rises above $82, and only lose money if the (HYG) falls below $75. Since the ETF was trading at $80.12 when the trade was put in, the trader gets to capture upside exposure just 2.3 percent above current levels, while only being exposed to downside 6.4 percent below current levels.

"It looks like the trade was taking advantage of that downside protection costing more than the upside pop," said Stacey Gilbert, head of derivatives strategy at Susquehanna. "The sentiment is skewed to the downside, but this trade is taking advantage of that skew."

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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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