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Here's portfolio protection, at no cost: Trader

Amid the recent market turmoil, some traders are looking to protect their portfolio. But that task has become increasingly difficult as the VIX, which measures prices for puts and calls on the S&P 500 has become more expensive. However, one trader appears to have found one way to buy protection at a low costs.

"I actually think the S&P 500 could be down 20 percent from the high we made a couple of months ago," options strategist Dan Nathan said Friday on CNBC's "Options Action." The S&P 500 is currently more than 8 percent from its high of 2,134.72 hit in late May.

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"It's very difficult to just buy put options, we want to go out and sell something against it to mitigate the high volatility," said Nathan, founder of RiskReversal.com. The VIX is currently trading near 26.

Looking at the SPY, the ETF that tracks the S&P 500, Nathan targeted the $180 level, which is slightly under the year-to-date low of $182.40 made on Aug. 24. "I want to define a range down to $160 if the SPY does really start to come apart," he continued


Specifically, Nathan recommended buying the October 180/170 1x2 put spread for even money. This is a bearish strategy by which a trader will buy one put and sell two lower strike puts of the same expiration—eliminating the total cost of the trade. The goal is for the stock, or in this case ETF, to fall to the strike of the puts you are short. Note that since you are short those puts, you could be forced to buy the ETF at that level, and the structure could tie up some margin.

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"After this volatility spike that we've had I'm looking for trade structures that are going to mitigate some of that decay if we have a market that continues to head lower," he added. "I'm targeting $170, and that would be 20 percent from the recent highs."

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  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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