Market bull uses an unusual method to bet on the market rising even higher

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.

The S&P 500 has enjoyed "a very nice uptrend," but over the past week, "we've begun to pull back," Todd Gordon of TradingAnalysis.com said Friday on CNBC's "Trading Nation."

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."


Videos

Trades to Watch

Trader Bios

About

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

Read more

Connect