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Huge trade offers chance to make $17 million if stocks tank

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Stocks stage steep comeback

In a massive trade executed on Friday afternoon, one trader appears to be betting big that small-cap stocks are set to sink.

At 2:30 E.D.T., a trader appeared to execute a "put spread" on the IWM ETF, which tracks the Russell 2000 small-cap benchmark. Specifically, this trader bought 38,447 120-strike put options contracts and sold an equal number of 114-strike puts, for a total cost of $1.55 per share. Since each options contract refers to 100 shares of stock, the trade cost nearly $6 million in options premium.

Maximum profit here comes if the IWM, which was at $120.84 at the time of the trade, closes below $114 on November 18. If small caps indeed slide more than 5 percent in as many weeks, this options spread will be worth $6 per share, for a $17.1 million profit.

This options trade, one of the largest of the day, appears to represent a bearish outlook on the market. However, it is worth remembering that options on broad indexes are more frequently used to hedge than to speculate, so this could also represent downside protection against a diversified portfolio. Indeed, this trade could perhaps be designed to protect a portfolio against a big market reaction to the presidential election.

Some traders believe that the election could bring some big moves between now and year's end.

"I think we could have more volatility over the next three months plus, particularly with the election and its fallout," Zachary Karabell, head of global strategy at Envestnet, said Thursday on CNBC's "Trading Nation."

If he proves to be right, buying short-term options could prove to be a great move in hindsight.