Stocks could correct—how to buy protection: Technician

It's been a wild month for volatility.

The CBOE Volatility Index has bounced between year highs and year lows in July. But as the market continues to trade in a tight range, and the popular fear gauge has dropped once again to near historical lows, some traders think now might be the perfect time to buy some protection.

"We're setting up for a bull market correction," technical analyst Ari Wald said Tuesday on CNBC's "Trading Nation."

For Wald, a combination of seasonal weakness and market participation could prove rocky for stocks in the coming months. "The advance decline line, an indication of the breadth of the market, has been making lower highs and is actually at one of its lowest levels of the year," he added. "We're also in this very weak seasonal period of the year."

Wald sees the S&P 500 declining to the 1,970 level before resuming its long-term advance, and with the VIX still reading around a relatively low level, he sees "a pretty attractive buying opportunity" to play for a hedge against stocks. The S&P closed at 2,093 on Tuesday, up 1.2 percent for the day.


But as the VIX tends to see massive swings higher and lower, buying it outright could prove dangerous, according to options expert Andrew Keene.

"I don't want to outright get long the VIX because I think [in the long run] the market can move higher and the VIX could move lower," said the founder of Keene on the Market.

Instead, for those worried about a stock market correction, Keene recommended buying VIX call options as a means for protection.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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