Although the stock market appears poised to continue its rally toward record highs, traders can use options to protect their positions against potential pullbacks or even a downturn, said Jeff Kilburg, CEO of KKM Financial. “You can sleep now for the next three months if you own these puts, no matter what happens overnight or whatever curveball comes our way,” Kilburg said Wednesday in an interview on CNBC’s “Power Lunch.” An option is a financial instrument whose value is based on the price of underlying securities such as stocks. It gives traders the right to buy or sell an asset at a pre-agreed price before a specific 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 purchased the Dec. 31 $640 put. That means he expects the market won’t rise another 5% before New Year’s Eve, he said. The SPY ETF closed Wednesday at $673.11. His investment advice came as stocks hit all-time highs on Wednesday, despite the latest failure by U.S. lawmakers 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 flat line, down just 1 point. As the market continues to gain momentum, volatility is low, making options premiums inexpensive, according to Kilburg. This is why it is an opportune time to buy puts, he explained. “If you think the market is going to go higher, which could easily happen with this high sugar level… you’re not going to want to sell on capital limit,” Kilburg said. He added that stocks could fall as investors digest new financial information from companies during earnings season, which begins next week. “Earnings season is coming up, so this is going to be important because if companies start lowering their expectations, cash could flow out,” Kilburg said.
