With stocks 'frothy,' here's how to profit: Trader

Stocks look 'frothy.' Here's how to profit: Trader
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The S&P 500 has been flirting with record highs for months. But despite a series of relatively positive earnings, one trader who looks closely at both the charts and the options market says stocks may have run out of steam in the short term.

On CNBC's "Trading Nation," Andrew Keene said Thursday he doesn't see the S&P 500 trading outside of its current range.

"Every time we sell off, we find buyers. And every time we rally, we see sellers," the founder of Keene on the Market said. "I don't think we're looking to break out."

Midday Thursday, the was less than 10 points away from its high of 2,119, which was hit in late February, but despite the market's proximity to new highs, Keene said it's looking a bit "frothy."

"I think we could potentially sell off," he said.

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So to play for potential downside in the S&P 500, Keene turned to the options market. "I'm looking to sell a call spread here in the S&P 500 ETF." Selling a call spread is a mildly bearish strategy where a trader will sell an option to buy, and then buy a higher strike call at the same expiration.

The goal of the trade is to collect the price of the options that were sold.

In this specific trade, Keene sold the S&P 500 ETF, the SPY, September 215/216 call spread for a 50 cent credit. That 50 cents is the most Keene can make on the trade, but in order to keep all that money, he needs the SPY to stay below the strike of the call that he sold by September expiration, or in this case, below 215.

"I don't see the SPY going above the 215 level," said Keene.

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The trade is not the most lucrative in the world, but it does have a high probability of success.

"On this trade, my break even is 215.50, so I'm going to make money if the SPY goes nowhere, down, or even rallies as much as 2.5 percent."

Of course, said Keene, the long-term trend for the market is still intact. "The weekly chart is very strong, we're in a clear bullish channel," he said. "Buy on any meaningful pullback."

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