You need to hedge your stocks now — here’s how to do it: Trader

With the market rally in full swing and earnings season gearing up, one trader has decided to look at the bond market to hedge his portfolio.

Todd Gordon of TradingAnalysis.com believes that with the markets trading near last week's record highs, it could be the moment for investors to play bonds.

"I think it's time now to hedge [our portfolio] as we become very overbought in the stock market," Gordon said Monday on CNBC's "Trading Nation." "I see the bond market, specifically TLT, which is the ETF that tracks 20-year U.S. Treasurys and longer, pulling back into support."

On a chart of the TLT, Gordon points to a general uptrend in the TLT that is starting to pull toward lower support levels. He identifies the new support levels as being between $137.50 and $140, though Gordon believes that the TLT's movements will also depend on how earnings affect stocks.

"We'd expect to see a little bit of a move down," he said. "Then if the stock market becomes overbought, we begin to pull back because we're heading into a huge earnings week. We could see the TLT begin to push higher."

Bonds (as tracked by the TLT) and stocks are generally thought to move in opposite directions, given that if investors are purchasing the one, they are assumed to be selling the other. On the other hand, in recent weeks, falling bond yields and thus rising bond prices have been considered one of the main drivers of the market's rise to record highs.

When it comes to the TLT, Gordon is looking to sell puts, and then purchase lower-strike puts to create a bullish put spread. This type of structure should profit so long as the TLT stays flat or rises.

"Basically what we're doing is selling puts below support, which is a net long position in the bond market, which will serve as a hedge to your long stock portfolio," he said.

The TLT was trading around $138 in Monday trading.


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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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