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Top options strategist lays out a way to protect your portfolio from a sell-off

VIDEO1:1301:13
How to use options to protect against market turmoil

Markets are suddenly souring after a monster run that began in early October.

Obviously good times can't last forever, but if you're stuck feeling stock shock, there are some ways to protect yourself from further downside without pulling the ripcord on your whole portfolio.

According to Optimize Advisors President Michael Khouw, using options could be a great way to buy insurance against further market mayhem, but there are some key rules that should be followed.

"First thing, don't chase, don't panic. The second thing is, when implied volatility is higher, options are more pricey, so you want to look for spreads that have high payoffs," Khouw said Monday on "Fast Money."

Using spreads is a good way to give yourself exposure to profits while mitigating the cost of the trade. Buying a vertical put spread, for example, involves buying a higher-strike put and selling a lower-strike put against it.

While reducing the overall cost of the trade, this strategy also moves your breakeven level higher than it would be if you just bought the higher-strike put outright. You'll lose access to profits below the lower-strike put that you sell, but you're entitled to everything between the breakeven level and the lower strike.

"If you look at the [S&P 500 ETF] March 300/290 put spread, that $10 wide put spread, would have cost about 95 cents today," said Khouw. "If you spent a half a percent of your long equity portfolio to buy that spread, you would cut your exposure to a [10% move lower] between now and March expiration in half.

"That way, you don't need to sell your stocks and you have some measure of protection."

In this particular trade, you could make up to $10 per contract on a trade that cost only 95 cents per contract.

The S&P 500 ETF was trading about 1% lower on Tuesday.

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