Trader attempts to use the Fed’s next move to make a 147% profit

The markets remain confused after Federal Reserve chair Janet Yellen's Friday morning speech at Jackson Hole. However, one trader is making a bet in case a rate hike becomes more likely.

Todd Gordon of sees a possible interest rate hike on the horizon, and believes that certain sectors are set for some big moves.

"The sectors that are responding the most are those interest rate sensitive sectors," Gordon said Friday on CNBC's "Trading Nation." These include consumer staples, which Gordon believes are in danger of a move to the downside should the Fed follow through on its hints to hike rates.

"Right now, it looks like the markets are starting to price in a Fed rate hike," he added. "If interest rates move up, that means the interest rate-sensitive sectors like XLP should move to the downside," Gordon said, referring to the exchange traded fund (ETF) that tracks consumer staples stocks.

Yellen said that "the case for an increase in the federal funds rate has strengthened in recent months," but pointedly refused to set a timetable for a possible increase of the federal funds rate target.

The XLP did see a drop following the Fed chair's speech as the markets attempted to decipher her words. Since it offers a dividend yield of nearly 3 percent as compared to 2 percent for the S&P 500, the ETF is relatively sensitive to bond yields. The ETF holds stocks such as Procter & Gamble, Coca-Cola, Philip Morris and Altria.

Looking at a chart of the XLP, Gordon determines that the ETF is on its way down. He looks at a previous drop from $56 to $54 to determine that the recent highs of $55 could go down by the same $2 different to $53.

As a result, Gordon wants to buy the October 55-strike puts and sell the October 53-strike puts for $0.81, or $81 per options contract. Gordon's trade has him risking $81 to make a total of $200—a whopping 147 percent return.

"If XLP moves back above the $55 mark, I want to cut the trade, protect any premium that's remaining, and move on to the next trade," said Gordon. "But otherwise, we should be able to go down to the $53 in the face of a potentially increasing interest rate once this Fed ping-pong match is over."


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Trader Bios


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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