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One trader bets $5 million that the S&P 500 will give up all of its 2019 gains

Options trader bets $5M the pain is just beginning for stocks

Even as equity markets look to rebound from Monday's disaster, a major trade in the options market showed that investors are starting to prepare for the potential of a second-half bloodbath.

In the heat of the worst day of the year for the Dow, S&P 500 and Nasdaq, one intrepid trader bet more than $5 million that the S&P 500 would give up all of its 2019 gains by the end of October.

On Monday evening's CNBC's "Fast Money," "Options Action" trader Michael Khouw noted a purchase of 2,250 of the Oct. 31 expiration 2,500-strike puts on the S&P 5000 for $22.30. The trade came on a particularly bearish day for the index in the options market, during which puts traded at twice their average volume and twice the volume of calls.

Since each options contract is worth 100 shares of the index, the total premium involved in putting this trade comes out to $5,017,500.

That trade breaks even down at 2,487.70 on the S&P, which would represent a decline of about 13% from Monday's close, or nearly 30 points below where the index closed 2018.

It's not every day that a trader puts on a hedge this big against such a direct proxy for the broader equities market, but the move in the index wouldn't be unprecedented. Just last year, between the S&P 500's highest close and the Christmas Eve lows, the index plunged 20%. As an investor with a large portfolio, this trader decided not to get burned again.

"To put some perspective on the size of this trade," said Khouw, "that would be a hedge against a portfolio of about $560 million."

The S&P 500 index was trading 0.3% higher Tuesday morning.