"A strengthening yen signifies risk aversion ... generally when you see the yen strengthen that indicates that global equities are rolling over or about to roll over," Todd Gordon said in a recent CNBC "Trading Nation" interview. The Japanese currency has been on a tear of late, hitting a 17-month high versus the dollar on Monday. The yen and equities have an inverse trading relationship, when the currency rises, it usually corresponds with a dip in stocks.
By Gordon's work, this risk-off environment should continue over the course of the coming months. Looking at a chart of the FXY, the ETF that tracks the yen, Gordon noted that the currency is in an "explosive" uptrend. "I want to put on a trade in the yen that would hedge and long positions on the market that you have," said the founder of TradingAnalysis.com and a CNBC contributor.
So in order to hedge against a decline in U.S. equities, Gordon made a bullish bet on the FXY, the ETF that tracks the yen. Specifically, Gordon purchased the FXY May 88/92 call spread for $1.60. The goal is for the ETF to rise to that strike that Gordon sold short — or in this case, $92 in the next month. That's another 3 percent move from where the ETF is currently trading.
"This is a good trade if you want to hedge a longer-term portfolio or, if you are bearish on the market, this is a good way to express your bias," he added.