With a possible Brexit on the horizon, the dollar has strengthened as the referendum creeps closer. One trader sees the greenback going even higher, making an ETF tracking the U.S. currency worth an options play.
Looking at a daily chart of the U.S. dollar ETF UUP, Todd Gordon of TradingAnalysis.com starts off by pointing out that options on the UUP have grown more expensive, giving traders an attractive opportunity to sell them.
"We would like to sell this expensive implied volatility," Gordon said Tuesday on CNBC's "Trading Nation."
When it comes to direction, he projects the UUP will rise further.
"We can see that the UUP as we [look longer term] has made a higher low looking to break out of downtrend resistance," he said.
According to Gordon's downtrend line, the UUP could break past $24.75 in the short term. Given currency market volatility, he decides to sell a put spread to take advantage of the UUP's potential rise while capitalizing on options prices.
"I want to sell an expensive put spread because remember implied volatility is high so it doesn't make sense to buy calls here, it's a better trade to be selling puts," he said. "We like to contain our risk so we like to sell a nearby put [and] buy a lower one creating a put credit spread."
Gordon's trade has him selling the July 25-strike put and capping risk by buying the lower July 24-strike put for a total cost of 50 cents. This creates a trade with a 1-to-1 risk-to-reward relationship.
The key to this trade, however, is his insight about the options market.
"The great thing about a credit spread is even if the market doesn't go up like we anticipate, if it goes sideways or even slightly lower, any kind of drop in implied volatility will make our trade profitable," the trader said.
