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Here’s how to protect your financial stocks

Options Action: Trouble ahead for banks?

As the market bounces back, it may be high time for traders to buy portfolio protection. And that's just what one big options trader did, using the SPDR Financial ETF (which trades under the ticker symbol XLF).

In one of Thursday's biggest trades on that ETF, one options trader bought 25,000 December 21-strike puts for 17 cents per share.

Since a put allows a trader to sell a stock at a given time and price, this low-cost insurance will begin to provide protection if the XLF trades below $21, or about 8 percent below Thursday's closing price.

"There's an old saw in trading that your should buy the dips and sell the rips, but when it comes to hedging your portfolio, you probably want to look at doing the opposite—and a big institutional trader was doing that in the XLF today," Dash Financial's Mike Khouw said Thursday on CNBC's "Fast Money."

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At the same time this firm bought the December 21-puts, it also sold back the November 21-strike puts, suggesting that this trade is part of a systematic hedging strategy. But Khouw says the time is right to put trades like this on.

"What's going on here is that people are taking advantage of the fact that options are now getting cheaper again," Khouw said. "With stocks elevated, now's the time to put on some protection so you can ride your longs into the end of the year and breathe easy."

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