Stocks kicked off the week higher on Monday, right after the S&P 500 saw its best week of gains for the entire year. And with several potential catalysts for more volatility on the horizon, one trader is looking at a strategy to protect profits going into year end.
Khouw said that with the Federal Reserve's December meeting and holiday season both approaching, investors should consider a put spread to protect against a drop of up about 10 percent, based on where the S&P 500 ETF (SPY) traded during its summer lows.
Khouw recommends buying what's called a put spread, an options strategy that offers limited protection against the S&P 500. Specifically, Khouw suggested buying the January 209-strike put for $5 and selling the January 189-strike put for $1 to create a bear put spread for $4 each. The trade offers protection in the SPY ETF from $205 to $189 through January.
The SPY rose slightly on Monday morning, trading around 210. Khouw's trade would account for a more than 2 percent drop for the ETF to 205.
"The important thing is, the decay in that $1 option is going to offset a lot of the decay in the short term, especially in the 209-strike put that I get," Khouw said.
In addition, Khouw said costs are further mitigated by the SPY dividend to be paid out by January expiration.