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Trader Spends $5.3 Million to Bet Russell 2000 ETF Will Drop

April 10 (Bloomberg) -- An investor paid about $5.3 million for a trade that will pay off if the iShares Russell 2000 ETF falls at least 2 percent by May.

The trader bought 40,000 bearish contracts on the small-cap stock ETF expiring in May with a strike price of $113, while selling the same number of May $107 puts in a strategy known as a put spread, according to JonesTrading Institutional Services LLC. The trade cost $1.33 to put on for each contract.

“It might be a short-term hedge for fear of further market losses over the next five weeks,” Fred Ruffy, a Chicago-based senior options strategist at Trade Alert LLC, said in a note.

U.S. stocks slumped today, wiping out gains from earlier in the week, as investors resumed selling companies that had some of the biggest rallies last year. Facebook Inc., Yahoo! Inc. and Tesla Motors Inc. lost more than 4.2 percent at 4 p.m. in New York.

The options transaction took place around 9:34 a.m. in New York, a few minutes after the small-cap ETF began trading at $115.11. Shares of the ETF dropped 2.9 percent to $111.96 today, the lowest close in two months.

The two contracts in the put spread had the highest volume among options on the Russell 2000. The trade will be profitable if the ETF falls to $111.67, Ruffy said. It has a maximum payoff if it slumps to $107.

Another investor purchased 15,000 puts expiring in May with a strike price of $113 and sold 18,750 bearish May $106 contracts, according to Christopher Rich, head options strategist at JonesTrading in Chicago. The trade took place at 10:04 a.m.

“These are bearish put spreads that are made more significant by how right they were,” Rich said in an interview. “They are big, but not enormous trades. What is notable is that they were right, right away.”

To contact the reporter on this story: Callie Bost in New York at cbost2@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net Cecile Vannucci

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