The bond rally has one technical trader shorting the regional banks

The rally in bonds is causing problems for the financial sector, and Todd Gordon of said that regional banks will actually be the hardest hit.

On Monday, Gordon discussed the beginning of a divergence between the gold market and TLT, the ETF that tracks long-term bonds. However, TLT is still up 7 percent this year, and climbed on Tuesday following North Korea's missile launch as investors fled to safety amid the morning market turmoil. The rise in bond prices sent yields down to 2017 lows, which puts regional financials "under pressure," according to Gordon.

"Yields are pressing lower, and that's taking that net interest margin earning capability away from the regionals," he explained Tuesday on CNBC's "Trading Nation."

While KRE, the ETF that tracks regional banks, is still sitting near a $51 "support," Gordon said that if yields continue to fall, KRE could actually break below the $51 region and hit lows unseen since December of last year.

To play for such a drop, Gordon wants to buy the September monthly 52-strike puts and sell the September monthly 49-strike puts for $1.04 total. This means that if KRE were to close above $52 on Sept. 15 expiration, Gordon would lose $104, the premium he paid for the trade.

But if KRE were to fall, as Gordon predicts, and close below $49 on Sept. 15, then Gordon will enjoy his maximum profit of $196.

However, Gordon also wants to minimize his chances of losing $104 on the trade, so he has established a stop-loss whereby he could get out of the trade for less.

"If the premium gets cut in half down to about 52 cents, we need to cut the trade [because] it's not working," he said.

The beaten-down regional banks have fallen more than 6 percent year to date.


Trades to Watch

Trader Bios


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