There’s blood in the water and a shark has sniffed it out and is swimming furiously to capture some some pounds of flesh.
What are we talking about?
A major bet was placed by one of Wall Street’s iconic traders betting that by Friday, February 17, the market would fall, by a lot. Will it decline or plunge, who knows? And perhaps it doesn’t matter, because either way it should go lower if this billionaire is right.
What’s The Trade?
Last week, allegedly billionaire Carl Icahn placed a massive bet on the S&P 500, buying up tens of thousands of bearish ES/puts in expectation of a big market decline.
What is noteworthy about the trade is Icahn has famously sold puts at various key market moments, betting on rallies, and been correct. Arguably his most famous bet was seeing the market plunge post-Donald Trump’s election victory. Before the dawn on that election night, Icahn had placed a massive bet that the market would bounce back when it became apparent that a Republican favoring lower taxes and economic tailwinds had secured office. He was right, and reportedly made over a billion on that trade alone.
His reputation among market makers is notorious. Icahn understands the windows of weakness in the market. He knows when implied volatilities are elevated pre-Jerome Powell speaking and skews are high. And he knows what happens when IV is crushed, and short sellers have been stopped out. He gets the reflexive feedback loops in the market and that the consensus trade of 2023 was: short technology stocks, demand destruction, 2% inflation by mid-year, and Jerome Powell to pivot.
And he knows what’s coming next.
Importantly, the bet is short-term; the position expires on February 17th. That means a massive 9-figure bearish bet was placed using derivatives that expire in just over a week (from transaction time).
Even among those who see whales place big trades regularly, this trade came as a surprise because the first massive bet of 24,000 contracts on Feb 8th wasn’t where the position ended. The very next day it was doubled! Now that’s conviction in a bearish thesis if ever there was one.
Will the big whale be right, and what should you do?
How To Trade
At the very least, the first step is take stock of your own portfolio now. If a freight train is coming towards it, the minimum that should be done is to not add any powder to a keg that might explode. In short, adding new long positions would be a dangerous game now. Of course, it’s smart to add new positions to a watchlist for monitoring. If a selloff does occur, this is exactly the time to be paying attention to where the deals will be.
Next, explore what ETFs capitalize on bearish S&P 500 moves. SH is the symbol for the ProShares short S&P 500 (1x). SDS is the 2x equivalent while SPXS is a 3x equivalent.
It should be noted that even the billionaires and whales get it wrong from time to time. If this bet was indeed placed by Icahn, it should be respected. He has an astonishing track record of accuracy in such plays. But he’s not infallible. In all things, risk management is crucial, and betting the farm on any one trade should always be avoided. The game is one of advancing inches at a time.