What every investor has to prepare for this week
This week, the Federal Reserve will announce its plans for the future of quantitative easing, its $85 billion monthly bond-buying program. And traders are warning that if the Fed announces a reduction, or "tapering," of asset purchases, the market reaction could be negative and violent.
For that reason, anyone who is long stocks might do well to hedge their positions ahead of Wednesday's announcement.
"This week, defense wins games," said Rich Ilczyszyn of iiTrader. He recommends taking on bearish positions on the S&P "in case we get that taper. The idea here is that if they do taper, I'm going to capitalize on this move."
The Federal Open Market Committee meets on Tuesday, and will release its statement on Wednesday. After that release, Fed Chairman Ben Bernanke will hold a press conference to clarify the Fed's intentions.
The market had expected the Fed to taper in September, but the Fed pushed it off, partially due to concerns over a potential government shutdown and debt default threat. Now, with economic data improving and Congress hammering out a budget deal, some economists say that the time is right.
(Read more: Get ready, here it comes: A December taper)
"The economy's performance has continually improved since Q1. ... This momentum is expected to persist as the job market gains further traction, the housing recovery broadens, the headwinds of fiscal drag and household delevaraging abate (if not reverse) and exports regain traction," wrote Deutsche Bank's chief U.S. economist, Joseph LaVorgna, in a Friday note.
"We expect the Fed to initiate a tapering of QE as soon as next week and expect asset purchases to be completed by late September/October of next year."
But Ilczyszyn notes that the market is largely one-sided in the belief that the Fed will push tapering off once again.
"Most analysts suggest that we won't get anything until the first quarter," Ilczyszyn said. "Because the market is all one way, the options are undervalued and I'm playing the other way."
Specifically, Ilczysyzn recommends buying bearish put options on both S&P 500 and 10-year note futures. This allows the holder to spend a certain amount of money to put on a bearish position that offers leverage to the downside, but will not end up costing any more if the asset soars.
"What I'm doing this week is buying some puts in the S&P" and "I'm using the 10-year note put as a vehicle. If they do taper, rates will spike, the S&P will drop and I'm positioned for that trade," he said.
Brian Stutland, meanwhile, would rather play for the possibility of a December taper by shorting gold.
(Read more: Experts predict a gold bounce soon—here's why)
"One thing I'm watching is the gold market this week," said Stutland, managing member of the Stutland Volatility Group. "If there's any indication of taper at all, I think it can get real ugly here. You could be seeing the lows put in on the year in gold should any indication happen."