Small caps have outperformed the broader market in the last month, but one trader is betting millions that the group of stocks is heading for a major pullback.
Looking at the IWM — the ETF that tracks small caps — one trader bought 90,000 of the June 108/98 put spreads, paying $1.50 for each trade. Since each options contract accounts for 100 shares of stock, this is a more than $13 million bet that the IWM could fall as low as $98 by June expiration. That's a nearly 13 percent drop from the ETF's price Thursday of around $112 a share. If the IWM reaches $98 by June expiration, the trader stands to make $78 million.
"When you see [this] kind of rolling action, it is likely a hedge against a portfolio of small cap stocks," RiskReversal founder Dan Nathan said Wednesday on CNBC's "Fast Money." Nathan noted that this wager was an extension of an already bearish bet on the small caps.
Shares of IWM — whose top holdings are made up of an array of health care, industrial and technology companies valued at or under $2 billion and include West Pharmaceutical Services, Piedmont Natural Gas and Vail Resorts — have clawed back to flat on the year after dropping 16 percent from the start of 2016 through mid-February.