One trader sees signs that stocks are set to keep rallying—and he has an interesting maneuver for how to profit off of his prediction.
However, the pullback from 2,213 down to about 2,190 has brought the market "back into support that was formed from the August and September high," he said, speaking about an area on technical charts that guard against further declines.
Essentially, the S&P 500 Index has fallen to a region that previously served as a level of resistance—and it is a tenet of technical analysis that old levels of resistance become new levels of support.
This implies that the market will likely move higher from here, and it has Gordon looking to make a bullish play on the SPY ETF, which tracks the S&P 500.
Often, options traders who are bullish will look to call options. However, given that options prices have risen lately due to increasing expectations of volatility, Gordon instead favors selling put options.
Specifically, Gordon sold the December 28th weekly 219-strike put, and bought the December 28th weekly 218-strike put, for a total credit of $0.40 per share, or $40 per options spread.
This credit is the most he can make on the trade, but if the SPY closes at or below $218, he will suffer a loss of $0.60 per options contract.
"Why would you risk $60 to make $40? Because we're selling puts that are 80 cents below the market… so we have a higher probability of success," he explained.
In other words, instead of playing for stocks to rise, Gordon believes it will be more profitable to bet that the SPY holds the level he defines as "support."