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Rally on! Why now is not the time to buy protection: Strategist

While the market seems to have more or less priced in the result of last Tuesday's election, investors may still want to wait and see before buying portfolio protection.

The so-called "fear index," the VIX, plunged more than 24 percent in the days following the election while the Dow Jones industrial average has rallied to yet another all-time high. Lower volatility implies that options are cheaper, and for investors who predict that the Trump rally could come to an end and a market crash might be on the way, buying protection at this time could seem like a good idea. But Susquehanna's head of derivatives strategy, Stacey Gilbert, believes that looking to the options market for protection at this time is premature.

"One thing I would be careful of is owning options outright," Gilbert said Friday on CNBC's "Trading Nation." "As much as the volatility has come in, they are still expensive on a historic level."

"For example, if we look at the S&P 500, that 5 percent out of the money put is your typical put that somebody would buy for protection," she added. "It's on the 45th percentile over the last five years, and that to me is just expensive for the situation that we're in right now."

However, Gilbert does also believe that if investors did want to buy protection, her "favorite strategy" involves buying an out-of-the-money put spread for the S&P 500-tracking ETF (SPY). While Gilbert doesn't see the market crashing as much as 10 percent, which was what many analysts predicted pre-election should a Trump victory occur, she thinks that any concerned investors could buy the February 211-strike puts and sell the 195-strike puts for under $3.

But ultimately, Gilbert doesn't see stocks falling in the short term. Since last Tuesday, the S&P 500 has risen about 1 percent, driven by sectors such as the financials, consumer discretionary and even energy while the Dow continued to break to record highs.

Bond proxies, however, have sold off since the election with utilities down almost 7 percent and consumer staples down about 4.5 percent as Treasury prices have sank and yields rose to their highest in 11 months. But even then, David Seaburg, "Fast Money" trader and head of sales trading at Cowen, doesn't see the market rally coming undone.

"Do I think we could sell off in different sectors? Absolutely. Do I think you should continue to take risk off within the consumer staples, within the utility names, some of these bond proxies, if you will? Of course," he said. "But I do not believe that we're going to see a market slide down 5 to 10 percent from these current levels."

On Monday, the S&P 500 did slightly reverse its gains from last week while the VIX surged almost 8 percent to return above 15.


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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.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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