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As fear exits the market, it may be high time for savvy investors to buy protection

As the CBOE Volatility Index falls to a four-month low, some say it's time to protect recent gains in the market.

"You might want to take advantage, just buy a few puts out there, because they're going to be relatively inexpensive, as the VIX is showing," Matt Maley, equity strategist at Miller Tabak, said Tuesday on CNBC's "Trading Nation."

The VIX uses the prices of options on the S&P 500 to gauge the amount traders expect the market to move in the next 30 days. And since options are more frequently used to hedge against downside than to speculate on upside, it generally measures the amount of investor nervousness — hence its nickname, "the market's fear gauge."

The VIX's current low level shows that investors see little need to rush out and buy protection against potential drops.

As another way of looking at this, an option that provides protection against an S&P drop of more than 10 percent between now and the end of the year costs less than a dollar on Wednesday afternoon — a mere 0.04 percent of the index level.

However, some say that the low level of anxiety implied by the VIX is justified.

"I think it's a relatively correct level of fear because the macro backdrop is actually very, very favorable. Economically, everything seems to be in expansionary mode," Boris Schlossberg, managing director of foreign exchange strategy, said Tuesday on "Trading Nation."

Barring any major "exogenous" shocks, the economy is going to likely see a fiscal stimulus, Schlossberg said, and forecasts a positive first half of the next year, the VIX reflecting this with its relatively low levels.

Some might argue that President-elect Donald Trump's recent tweets, which on Tuesday alone spurred shares of Sprint and tanked shares of Boeing, would drive some investors to buy protection. But Schlossberg said the market has become used to the high volume of political news.

"It's at this point the kind of situation where we are so used to every single day being a drama day that in fact, it actually makes the drama much less potent at this point," he said. "So I think unless the Chinese do come back at us, at this point I think things are relatively OK; nobody is taking it too seriously, and that's really what the market is communicating."


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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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