Options expert Dennis Davitt says he's never seen a better time than now to buy portfolio protection in the form of options.
"Markets are poised to explode like an over-compressed spring," he said. And yet "options are very inexpensive."
Davitt, chief investment officer at Harvest Volatility Advisors and the former head of Americas derivative trading for Macquarie and Credit Suisse, says a confluence of conditions is increasing risk in markets.
"There are a ton of crowded trades like short euro and short oil that haven't been working out lately. There's a historic lack of liquidity. Negative rates on long-dated government bonds are increasing the use of leverage in fixed income products, because you have to be levered at these low levels. And utilities and staples are trading at growth multiples," he said Tuesday in a phone interview with CNBC.
"And yet, options prices at these low levels are telling people, 'Everything is OK.'"
Indeed, the CBOE Volatility Index, which measures the price of options on the and thus gives a generalized measure of how much portfolio protection costs, has not so much as ticked above its long-term average of 20 since February.
For Davitt, therein lies the opportunity.
"Instead of arguing about whether or not everything is OK, just go out and buy protection."
Specifically, Davitt recommends buying an at-the-money put option on the SPDR S&P 500 ETF (SPY). Since a put option increases in price as the underlying asset falls, this grants protection against the market as a whole.
And even though this seems, to Davitt at least, like an anxiety-provoking time, he notes that such protective puts are trading at "half the price they would have cost in the past."
All in all, "never in my career has there been a better time to buy insurance against your portfolio," Davitt said.
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