Options Action
Friday 5:30 PM ET, Saturday & Sunday 6:00 AM ET
Options Action

Worried about volatility? Try this strategy: Trader

How to buy McDonald's for less than $6

So much for all that gloom and doom.

With the recent surge in the market, not only is the S&P 500 positive in 2016, but more than 40 percent of stocks in the index are now within 10 percent of their respective 52-week highs. But for investors holding on to winners, there is a way to protect profits in the event of increased volatility.

"It might be good to use options as a stock replacement strategy," Dan Nathan said Friday on CNBC's "Options Action," referring to a common options strategy where investors looks to sell stock and use a portion of those proceeds to make a bullish position using options.

"Some of the risks that were really prevalent in the market a couple of months ago that really took [the market and stocks] down may still be there, and you may consider how to stay involved in the name but still define your risk," added the founder of Riskreversal.com.

Read More JPMorgan Chase's forecaster says buy gold, not stocks

In order to utilize this strategy, Nathan suggested investors follow three basic criteria: a stock should have a high valuation; low options prices; and potential for volatility.

As an example, Nathan offered a stock replacement strategy in McDonald's. Shares of the fast food giant are within spitting distance of all-time highs. "I think McDonald's has been the real beneficiary of the sell-off in the dollar," added Nathan. "If the dollar were to rally, McDonald's at 23 times [earnings] could be expensive. So you may want to think about using low options prices to replace stock."

The trade that Nathan recommended was buying the June 120-strike call for $6. This trade makes money if McDonald's shares are above $126 by June expiration.

"That is one way you can use options to define your risk and replace stock," Nathan said.