While the stock market appears poised to continue its rally toward record highs, traders can use options to protect their positions from pullbacks and potential declines, said Jeff Kilberg, CEO of KKM Financial. “If you own these puts, no matter what happens overnight, no matter what curve balls come your way, you can sleep for the next three months,” Kilberg said in an interview Wednesday on CNBC’s “Power Lunch.” An option is a financial instrument whose value is based on the price of an underlying security, such as a stock. This provides traders with the right to buy or sell an asset at a pre-agreed price by a certain date. Mr. Kilberg explained how to use put and call options to reduce risk. He said he sold a $700 call on the SPDR S&P 500 ETF (SPY) on Dec. 31 and bought a $640 put on Dec. 31. This means he doesn’t expect the market to rise another 5% by New Year’s Eve, he explained. The SPY ETF’s closing price on Wednesday was $673.11. His investment advice comes as stocks soared to all-time highs on Wednesday despite the recent failure of U.S. lawmakers to pass a funding package that would allow the federal government to reopen. The S&P 500 index rose 0.6% on Wednesday, while the tech-heavy Nasdaq Composite Index rose 1.1%. The Dow Jones Industrial Average ended the day almost flat, down just 1 point. Kilberg said volatility is low and option premiums are cheap as the market continues to gain momentum. That’s why it’s the best time to buy puts, he explained. “If you think the market is going to go higher, which it easily could be at this high sugar price… you don’t want to sell within your capital limits,” Kilberg said. He added that stock prices could fall as investors digest new financial information from companies during earnings season, which begins next week. “As we approach earnings season, that’s important because if companies start talking about lowering expectations, cash could come out,” Kilberg said.
