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Although the stock market appears poised to continue its rally to record highs , traders can use options to protect their positions from pullbacks or even a potential downturn, 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,” Kilburg said Wednesday in an interview on CNBC’s “Power Lunch.” An option is a financial instrument that bases its value off the price of its underlying securities such as stocks. It provides traders the right to buy or sell an asset at a pre-agreed price by a particular date. Kilburg explained how to use put and call options to mitigate risk. He said he sold Dec. 31 $700 calls on the SPDR S & P 500 ETF (SPY) and bought the Dec. 31 $640 put. This means he anticipates that the market won’t go up another 5% before New Year’s Eve, he explained. The SPY ETF closed Wednesday at $673.11. His investment advice came as stocks rallied Wednesday to all-time highs , despite U.S. lawmakers’ latest failure to pass a funding measure that would allow the federal government to reopen. The S & P 500 added 0.6% on Wednesday, while the tech-heavy Nasdaq Composite jumped 1.1%. The Dow Jones Industrial Average ended the day near the flatline, falling by just 1 point. As the market continues to gain momentum, volatility is low, making options premiums inexpensive, according to Kilburg. That’s why it’s an opportune time to purchase puts, he explained. “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. He added that stocks may dip as investors digest new financial information from companies during earnings season, which begins next week. “Earnings season is coming, so that’s going to be important because if companies start talking down expectations, you could see cash coming out,” Kilburg said.
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