Trader bets on another emerging market rally

Emerging markets have been on a tear this year, and one trader believes there's still more room to run.

While the emerging-market ETF (EEM) is already up almost 24 percent in 2017, Todd Gordon of TradingAnalysis.com says Tuesday's drop in the dollar will further boost emerging market equities.

"The dollar has been dropping, and as the dollar drops, emerging market currencies will do well, which helps boost the equity prices," explained Gordon on CNBC's"Trading Nation."

To illustrate his point, Gordon looks at the dollar-tracking ETF (UUP) against EEM, observing that as the dollar has trended lower, EEM has continued to rally, thanks to the uptick in emerging market currencies. What's more, while the S&P 500 has trended higher, emerging markets have continued to outperform, as the S&P is up 8 percent this year.

"With the help of the falling dollar, the S&P and, now the Nasdaq being relatively stable, it looks like we could continue to see a push and possibly a move through that $45 mark in the emerging markets," said Gordon.

Gordon wants to buy the August 42-strike calls for about $1.54. This trade will turn a profit so long as the EEM closes above $43.54 on August 18.

"If the premium we just paid gets cut in half to about $0.77, let's go cut the trade and simply move on," he said. "Otherwise, it looks like the Emerging Markets ETF is ready to break through those 2014 highs."

If EEM were to reach $45 as Gordon believes, that would mean an almost 4 percent move from EEM's Tuesday levels.

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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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