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

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.


Trades to Watch

Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

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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