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Rallies should be sold—here's how to profit: Trader

The sharp and sudden rally on Wall Street has not only temporarily eased fears of a global meltdown, it has also decreased the price of protecting your portfolio.

The S&P 500 has rallied 6 percent from its low of 1,867, hit on Monday. That rally has caused the VIX—the market's so-called fear gauge—to collapse. Since the VIX measure prices for options on the S&P 500, what the decline in the VIX has really done is allow investors an opportunity to buy protection on their portfolios at more reasonable prices. And that's welcome news for one trader who specializes in options.

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"I think the rallies are going to be sold," Andrew Keene said Wednesday on CNBC's "Trading Nation."

Despite the rally, Keene sees trouble in the charts, as by his work, the ETF that tracks the SPY is now "below its 20-day and 50-day moving averages" and are testing a "gap around $197." Said Keene, "I want to take advantage of the high volatility and play for a move lower."

Still, with options prices relatively high by a historical standard, Keene sees an opportunity to take advantage of swollen options prices and sell upside volatility. Specifically, Keene sold the September 197/198 call spread for a 35-cent credit. This is a mildly bearish strategy in which a trader will sell a call and then buy a higher strike call of the same expiration. The goal is for the stock, or in this case ETF, to fall below the strike that the trader is short by the expiration date.

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"I'm not making a huge call for a 10 or 20 percent move to the downside," said the founder of Keene on the Market. "But I do think that if we continue to rally, we will get sold."

The SPY was trading 2 percent higher early Thursday, at around $198.

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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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