The Russell 2000 small-cap index hit its lowest levels of the year on Monday, and that has one trader betting on an even bigger drop ahead for the group.
The IWM ETF that tracks the Russell opened Monday trading at $132.76, after peaking at $140.86 at the beginning of March. For Todd Gordon of TradingAnalysis.com, the recent slip is highly significant, as it took the ETF below its recent range of $133 to $135.
That means that "there's plenty of room left on the downside," Gordon said Monday on CNBC's "Trading Nation."
Currently, he sees the next range of support at the $126 to $128 zone — a prior zone of resistance. That is "a key decision point" on the charts, according to the trader.
Since Gordon sees IWM falling to $128, he's looking to buy the April 132-strike put and sell the April 128-strike put for $1.24 per share, or $124 per options spread. The trade expires on April 21, meaning that if IWM closes at or below $128 on that day, then Gordon will make a maximum reward of $276.
IWM only needs to close below $130.75 on April 21 for his trade to make money, but if IWM remains above $132, the entire premium paid will be lost.
In order to mitigate losses, Gordon plans to sell out of the trade if its value falls from $124 to $62. That would indicate to him that "this was just a short-term shakeout."
