The Fed is at the center of attention next week as Wall Street waits to see if Janet Yellen will raise interest rates for the first time in nearly a decade. While many investors keep their eyes on what could happen to the equity market, one trader is honing in on currencies, specifically the U.S. dollar.
"I think traders should [focus] on what's going to happen in the currency market," Todd Gordon said Thursday on CNBC's "Trading Nation." "The U.S. dollar is generally viewed around the world as one of the strongest currencies right now, but if you take a look at what has happened to it for most of this year, you'll see it's in a downtrend."
Looking at a chart of the UUP, the ETF that tracks the dollar, Gordon, founder of TradingAnalysis.com, noted that it's in a downtrend channel. "The real gains in the dollar were made last year in 2014," he said. The dollar climbed 12 percent in 2014, and has remained relatively stealth for much of 2015, rising just half a percent in the last three months. "I think that's a real testament to what's going to happen next week."
Gordon believes that even if the Fed does decide to raise rates next week there won't be much of a boost for the dollar, as he expects the sideways and downtrending nature that's been exhibited this year to continue.
So to profit from a potential move lower over the next several weeks, Gordon turned to the options market. But with the recent spike in volatility has come an increase in the price of puts and calls, making it difficult to be long options. "It's a better idea to be short options, so that you can take advantage of that deflating value when volatility subsides post-Fed."
Specifically, Gordon sold the UUP October 25/26 call spread for 23 cents. This is a bearish strategy where a trader will sell one call and then buy a higher strike call of the same expiration. The goal is to have the stock, or in this case ETF, trade below the strike that you are short. Gordon sees profit in his trade if the UUP is below $25 through October expiration. The UUP was trading around $24.85 on Friday.
"You have a high probability of success with this trade," added Gordon.
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