U.S. stocks opened higher on Wednesday, with major indices on track for their best month in four years. However, one trader is betting on a sizable pullback for stocks in the next couple months.
Andrew Keene of AlphaShark said the options market is implying a $12 move lower for the S&P 500 ETF, SPY, by January, which would be a 6 percent drop from its current price.
"When I look at the daily chart, I agree that we had a nice rally off the August lows, and then we had a rally off the October lows," Keene said Tuesday on CNBC's "Trading Nation." "However, at this price point, we are completely overbought."
He said that as stocks move higher, they should run into resistance at the July lows, a previous level of support.
Keene is betting that SPY falls below $195 by January. To capitalize on that expected move, the trader recommends using a bearish options strategy called a "put spread." Specifically, Keen is buying the January 200-strike puts in order to speculate on downside, and selling the January 195-strike puts in order to reduce his costs.
SPY gained about 0.4 percent on Wednesday morning to $207.
"I'm not saying we're going to have a huge market correction. I'm just making a case [for a] sell-off to the 195 level," he said.
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