The strategist notes that options premiums are relatively inexpensive now due to the strong upward momentum and low volatility, providing an opportune time to buy puts.
The U.S. stock market’s record run, overlooking the macroeconomic and geopolitical headwinds, has caused anxiety among traders regarding a potential crash. Against this backdrop, a strategist recommended hedging against any pullback or a downturn by trading in put options.
The current bull market, which started in October 2022, has been uninterrupted for three years now. The S&P 500, the Nasdaq Composite, and the Nasdaq 100 Index are all at record highs, while the 30-stock Dow Jones Industrial Average trades just off its peak. The SPDR S&P 500 ETF (SPY), an exchange-traded fund (ETF) that tracks the S&P 500 Index, and the Invesco QQQ Trust (QQQ) have gained 16% and 20%, respectively, this year.
In an interview with CNBC, KKM Financial CEO Jeff Kilburg said, “You can sleep now for the next three months if you own these puts, no matter what happens overnight or what curveball comes at us.”
A put option is a contract that gives the buyer the right to, but not the obligation, to sell an underlying asset at a specific price by a particular date. Investors use this derivative if they fear a drop in asset prices so that they can either profit from a decline or hedge against potential losses.
Elaborating on his recent options trade, Kilburg said he sold the Dec. 31 $700 calls for on the SPY ETF for $7.75 and bought the Dec. 31 $640 put for $8.75. The SPY ETF ended Wednesday’s session up 0.60% at $673.11. This would cost an investor only $1, or $100 per lot spread.
Kilburg’s options trading reflected his expectations that the ETF wouldn’t rally another 4% by the year-end. The strategist also noted that options premiums were relatively inexpensive now due to the strong upward momentum and low volatility, providing an opportune time to buy puts.
“If you think the market’s going to build up higher, which it easily could on this sugar high … you’re not going to want to sell in capital limit,” Kilburg said, adding that stocks may dip as investors digest new financial information from companies during earnings season. “Earnings season is coming, so that’s going to be important because if companies start talking down expectations, you could see cash coming out.”
On Stocktwits, retail sentiment toward the SPY ETF receded further within the ‘bearish’ territory as of early Thursday, and the mood toward the QQQ ETF deteriorated further within the ‘extremely bearish’ territory. While the message volume on the SPY stream remained at ‘normal’ levels, that on the QQQ ETF increased to ‘high’ levels.
This bearish bet may come in handy as the government has gone into a shutdown due to the inability of lawmakers to agree on a stopgap spending bill. Much of the recent upside has been driven by rate-cut expectations, primarily due to evidence indicating weakening labor market fundamentals. Despite investors factoring in at least four rate cuts between now and early 2026, the central bank, led by Jerome Powell, hasn’t committed to lowering rates. Some of the recent Fed comments have been hawkish, reflecting its worries about sticky inflation.
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