One trader's bet against small-cap stocks could have him reaping big rewards.
Todd Gordon of TradingAnalysis.com said Friday on CNBC's "Trading Nation" that he's shorting the IWM ETF tracking the Russell 2000 index because of sector weakness in the index. According to Gordon, two out of the three biggest sector representations in the IWM, financials and health care, have been "pretty weak lately." In Gordon's eyes, this means that the entire index could soon be in trouble.
How far could IWM fall? On a daily chart of the ETF, Gordon indicates that IWM could head back toward its September lows of $120 in the short term. Earlier this week, the IWM also fell $3 from $126 to $123, leading Gordon to believe that IWM is set for another $3 drop to the $120 to $122 range.
To profit off of this move, Gordon bought the October 123-strike put and sold the October 121-strike put for $0.65 per share, or $65 per options contract. If IWM closes above $121 or below on October expiration, this options spread would be worth $135, meaning he would more than double his money.
"If the market were to go back above $124, the recent range of the last two days, I'm going to [get out of the trade]," said Gordon.
Small-cap stocks have rallied this year, with the IWM rising more than 10 percent year to date, handily beating the S&P 500.