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Here's how one trader is hedging against even more downside ahead

Trader uses bonds to hedge against even bigger downside in stocks
VIDEO5:1905:19
Trader uses bonds to hedge against even bigger downside in stocks

Stocks extended their losses Tuesday after a giant pullback that sent the Dow tumbling more than 1,000 points at the beginning of the week.

But Ascent Wealth Partners' Todd Gordon is still hedging his bets using the bond market.

Last week on CNBC's "Trading Nation," Gordon put on a call spread in the long-term bond ETF TLT to protect himself against a market downturn. He bought the March 27 weekly 145-strike calls and paired those with the sale of the March 27 weekly 150.5-strike calls as he saw bond prices rising amid all the volatility.

And the action over the past few days has sent TLT soaring, with the ETF hitting a new all-time high on Tuesday while yields hit a record low. Bond prices and yields move inversely to each other. The rally in bonds also means that Gordon met the upside target on his trade, but he wants to keep playing the bond market as he believes that the "selling is not over."

"I think people are looking for a reason to take some profits on these impressive gains that we've seen in the market, we've now seen evidence that it's spread out," he told "Trading Nation" on Tuesday.

Gordon wants to close the 150.5-strike call on his trade to sell a higher call, in this case the March 27 weekly 155-strike call as he sees TLT rallying to more highs at $155 or above. This means that Gordon is buying the March 27 weekly 145-strike call and selling the March 27 weekly 155-strike call.

Gordon said if you're just entering the trade, that same call spread would actually give you a potential profit of $471, but you would be risking $530, which is a skewed risk reward. That's why Gordon suggests that if traders are looking to put on a new TLT trade, they would be better off buying the March 27 weekly 150-strike and selling the March 27 weekly 155-strike for a total cost of $1.88.

This new call spread means that a trader would be risking $188, which is the maximum loss that they would incur should TLT close below $150 on March 27 expiration. But, should TLT rally and close above $155, they could make up to $312.

TLT has risen 12% year to date, this while Tuesday's extended sell-off has erased the market's gains for the year.

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