As the U.S. dollar strengthened considerably on Friday, rising to a seven-month high against the euro, trader Todd Gordon spotted an opportunity to play for even more greenback strength in the months ahead.
"The dollar is threatening to break the range that's been in place since March 2015 as we're moving into a series of potential interest rate increases, which makes that U.S. dollar more attractive overseas," Todd Gordon, founder of TradingAnalysis.com, said Friday on CNBC's "Trading Nation."
To make his trade, Gordon turns to the FXE, an exchange-traded fund designed to track the euro.
Gordon notes that the FXE has traded in a tight range for most of 2015 and through this year, and believes that the ETF will fall back to the lower part of this range, at about $103.
"We can see that the euro is in quite a nice downtrend already, so we expect to see this trend bringing us down to about the 103 mark," he says.
In order to play for such a move, Gordon buys the December 106-strike puts, and sells the December 103-strike puts, for a total cost of about $1.00 per share, or $100 per options contract.
Since this trade gives Gordon the right to sell FXE for $106, but then gives away to someone else the right to sell it for $103, this trade sees maximum profits at or below the $103 level. If FXE closes at $103 or lower on December 16, this trade will return a profit of $200 per contract. On the other hand, if FXE closes above $106, the put spread will expire worthless, and the entire amount spent will be lost.
Gordon plans to exit the trade before that happens, however.
"If the premium that we have put out there goes down to 50 cents — meaning half the position has eroded — stop the position out and simply move onto the next trade idea," Gordon advises.
Trader takeaway: Todd Gordon is bearish on the euro, and is buying the December 106/103 put spread for about $1.00 per share to profit from a further euro slide.
