Trader Bet $65 Million in Options on Stock Rebound Into Holiday

(Bloomberg) -- While U.S. stocks fell Tuesday ahead of what’s expected to be a hawkish Federal Reserve policy meeting, one investor just bet $65 million on a quick market rebound. 

The trade saw someone purchase roughly 20,000 call spreads that are linked to the S&P 500 and expire right before the Christmas holiday. The transaction involved selling calls with a strike price at 4,750 to fund bullish options exercisable at 4,650. The benchmark slipped 0.8% to 4,634 Tuesday.  

The strategy behind the trade is impossible to discern. It could be a bet on a Fed that is more dovish than expected when the central bank announces its latest policy decision Wednesday. Or it could be simple speculation that what is usually a seasonably favorable period for stocks delivers in 2021. To Danny Kirsch, head of options at Cornerstone Macro LLC, the trade conveyed an undeniably optimistic market view, at least for the short term.  

It’s “a big trade,” Kirsch said in an interview. “It’s playing for a rally over the week and a half.”

Stock traders have been whipsawed in the past three weeks since the omicron virus variant emerged and the Fed signaled it is ready to roll back support to battle inflation that’s raging at rates not seen in decades. The prospect of higher interest rates forced many investors to rethink bets on risk assets from loss-making software firms to newly minted public companies with uncertain profit prospects. 

Even as speculative assets have been battered, index heavyweights such as Apple Inc. have helped buoy the broad S&P 500, which hit an all-time high on Friday.  

The Fed is expected to accelerate the pace of winding down its bond-buying program, perhaps doubling to $30 billion per month, which would bring it to an end in March. That would clear the way for interest-rate hikes next year, the threat of which has rattled markets since Chair Jerome Powell’s policy pivot two weeks ago.

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