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.

Read MoreSeven reasons why the market has gone totally nuts

"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.

Read MoreNasdaq 100 is set to plunge 29%: Technician

"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.

Want to be a part of the Trading Nation? If you'd like to call in to our live Wednesday show, email your name, number and a question to TradingNation@cnbc.com.


Trades to Watch

Trader Bios


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.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more