Mark Sebastian's iShares MSCI United Kingdom Trade

Speaking on Bloomberg Markets, Mark Sebastian of Option Pit spoke about Brexit and its possible impact on the market.

Sebastian explained that many people are betting the United Kingdom is going to stay in the European Union, but there are also some polls that indicate the UK could decide to leave the EU. Both decisions could spark a sharp move of the S&P 500. Sebastian expects a 5 percent move lower if the UK decides to leave and a 2.5 percent move higher, if it decides to stay. He added that the volatility index (VIX) has moved significantly higher without a selloff in the S&P 500 index and this indicates that the market could make a strong move.

Related Link: Goldman Sachs: 3 Options Trades To Make Ahead Of The Brexit Vote

For investors who want to take a position based on the Brexit vote, Sebastian recommends an options strategy in iShares MSCI United Kingdom EWU. He wants to buy the July 14 put for $0.50 and sell two July 13 puts for $0.25 each. If the stock drops below $14, the trade is going to start making money and it can maximally make $1 in case of a decline to $13. If it declines below $13, the profit starts to trail off and the trade begins to lose money below $12. The stock needs to pull back 21 percent to start losing money and Sebastian thinks that such a move is not going to happen.