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Stocks will see a ‘Santa Claus rally,’ and here’s how to cash in: Trader

Small stocks were enjoying a big day on Monday, as the Russell 2000 was up some 1.5 percent in afternoon trading. And one trader believes that another big surge for the small caps is around the corner.

A big thing the index has going for it is the sector breakdown. The financials make up nearly 20 percent, while industrials are 15 percent; in both cases, the exposure to these surging sectors is larger for the Russell 2000 than for the large-cap S&P 500.

"We've seen really strong moves in the financials and industrials, which are all very well-represented inside of the small caps," Todd Gordon of TradingAnalysis.com said Monday on CNBC's "Trading Nation."

Further, the technical analyst says that historical trends are pointing to a general market rally in December.

"We're moving into a very strong period called the 'Santa Claus rally,'" explained Gordon. "Statistically speaking, since 1990, December will finish positive 74 percent of the time."

Finally, on a chart of IWM, the ETF that tracks the Russell 2000 index, Gordon sees an upward "channel" that extends back to 2009, and the top of that channel suggests that IWM could actually rise above beyond $140. As of Monday afternoon, the ETF was trading at about $133.


To express his bullish perspective, Gordon is putting on an options trade called a "call spread." Specifically, he is buying the January 135-strike calls and selling the January 140-strike calls for a total cost of $1.40 per share, or $140 per options spread.

For Gordon to make money on this particular trade, IWM would have to close above $136.40 on Jan. 20. If IWM were to close at or above $140, Gordon would make a maximum reward of $360. Meanwhile, if the ETF closes below $135, the entire cost of the trade will be lost.

The IWM has surged nearly 15 percent in the past month, outperforming the S&P by a wide margin.

Trader takeaway: Todd Gordon is betting on a continued rise for the small-cap stocks by buying the IWM January 135/140 call spread for $1.40 per share.

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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.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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