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Trader betting on this ETF ahead of Trump’s inauguration

Trader bets on this ETF ahead of inauguration

Stocks have surged and bonds have sunk following Donald Trump's election, but as his inauguration approaches, one trader is looking for a bit of a reversal.

"We're starting to see the bond market and the gold market rally up into Inauguration Day as the stock market is acting a little weak up here," Todd Gordon of said Tuesday on CNBC's "Trading Nation."

Gordon recommends playing the iShares Barclays 20+ Year Treasury Bond ETF, the TLT, to capitalize on the strength he forecasts in the bond market.

Examining a chart of the TLT, Gordon points out that the ETF is forming a kind of a rounded bottom around the $120 mark and inching higher, indicating to him that shares of the ETF are set to advance.

"It looks like we're going to try to pierce up through this resistance level just at about $123, and we're focusing in on this little gap up here just around the $130 mark," Gordon said.

"I don't know if we're going to get up that high into inauguration, but let's play a move up through this resistance on an approach of that gap close," he said, marking a gap between the $130 level and the upper $120s.

Turning to the options market to trade the TLT, Gordon recommends buying the Jan. 27 weekly 123-strike calls and selling the Jan. 27 weekly 125-strike calls for a cost of 64 cents per share, or $64 per options spread.

In order for Gordon to make money on his trade, the TLT would have to close at or above $123.64 on Jan. 27. If the ETF closes above $125 on that date, Gordon's trade would earn him a maximum reward of $2 per share, just about tripling the money he spent on the trade. However, if the price of the TLT remains below $123 on Jan. 27, Gordon will lose the $64 he initially spent.

That said, he has a plan to back out of the trade if his theory proves wrong.

"If it gets down to 30 cents, in terms of premium remaining, the trade goes against us, let's cut the trade and move on," Gordon said.