Worried about stocks? Here’s one way to hedge: Trader

The yen is going to continue to skyrocket, and that could mean more volatility in the stock market — according to one trader.

"A strengthening yen signifies risk aversion ... generally when you see the yen strengthen that indicates that global equities are rolling over or about to roll over," Todd Gordon said in a recent CNBC "Trading Nation" interview. The Japanese currency has been on a tear of late, hitting a 17-month high versus the dollar on Monday. The yen and equities have an inverse trading relationship, when the currency rises, it usually corresponds with a dip in stocks.

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By Gordon's work, this risk-off environment should continue over the course of the coming months. Looking at a chart of the FXY, the ETF that tracks the yen, Gordon noted that the currency is in an "explosive" uptrend. "I want to put on a trade in the yen that would hedge and long positions on the market that you have," said the founder of TradingAnalysis.com and a CNBC contributor.

So in order to hedge against a decline in U.S. equities, Gordon made a bullish bet on the FXY, the ETF that tracks the yen. Specifically, Gordon purchased the FXY May 88/92 call spread for $1.60. The goal is for the ETF to rise to that strike that Gordon sold short — or in this case, $92 in the next month. That's another 3 percent move from where the ETF is currently trading.

"This is a good trade if you want to hedge a longer-term portfolio or, if you are bearish on the market, this is a good way to express your bias," he added.

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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.

Follow Michael Santoli on Twitter @michaelsantoli

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