How to give yourself a 70% chance of making money on gold: Trader

The gold miners ETF (GDX) has surged this year, and one trader presents a way to play the ETF with a chance of making money that "exceeds 70 percent."

The trade, which Todd Gordon of presented Tuesday on CNBC's "Trading Nation," begins with the thesis that gold is set to keep rising in the short-term due to currency trends.

"We've seen a pretty strong move up in the underlying gold market. The miners are leading the way," said Gordon. "I think if the U.S. dollar continues to stay on the soft side, it should press gold higher."

Gordon points out a $28 resistance on the ETF, which dates back to highs in 2014. Thanks to a recent push up to what he terms a "bull flag," Gordon believes the gold miners ETF is set to push up to this $28 resistance.

Gordon will use this predicted move to make his trade, but he cautions that buying options now is tricky.

"We are in a higher implied volatility market. There's been a lot of action going on in the gold market, so options — puts and calls collectively — are pushed up here," he said. "So it's not a smart play to be bullish by expressing that opinion with long calls."

Instead, Gordon expresses his bullish thesis by selling the 24-strike put to buy the 22-strike put. This trade will give him $0.53 per share, while risking a loss of $1.47 that is, the $2 width of the spread minus the $0.47 premium he is taking in.

That sounds like a low reward for the risk, but Gordon says that given the current market outlook for gold, the chances of his trade succeeding is very high, such that it "exceeds 70 percent."

"The marketplace isn't just going to give you a hugely favorable reward-to-risk trade with a high degree of success; the two have to balance each other out," he said. "So we have a high degree of probability by selling the put spread below the market on the way up towards that $28 from the weekly chart."

Read MoreThe volatile gold play that's nearly doubled this year


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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.

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 CNBCand 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

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