No. 2 - Use Protection

You rode the S&P 500 record to some nice returns this week. But after gains of this magnitude you're understandably a little on edge. How do you guard your gains?

Karen Finerman says to protect her portfolio she buys out of the money puts – “July 2% out of the money” she says. Dylan explains in this case the put goes up in value if the S&P drops more than 2%.

Pete Najarian agrees with Karen about buying the downside out of the money puts – and he presents a somewhat elevated trade.

Here’s the transcript.

Pete says “If you buy the put, the 1525 put in July (which is currently $19), it’s only 10 points out of the money right now. In other words it’s 10 points from being there. And volatility goes up as the market goes down. That’s a winner.”

Pete also says “You can sell the upside call. You can go up to the July 1575 (which is currently $11) You sell that call you‘re getting close to $11 dollars. The put is costing you about $19.”

Dylan Ratigan adds “You’re selling the 1575 and collecting the $11 and using the $11 to help pay for the cost of your put – and what you’re giving up is any upside if the S&P goes beyond 1575.

Dylan also reminds the panel that ProShares Short Dow30 (DOG), ProShares Short S&P500 (SH) and UltraShort QQQ ProShares (QID) are three exchange traded funds that go up when the market goes down.

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Trader disclosure: On June 1, 2007, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders:
Najarian Owns (MU), (BTU), (AAPL),(KR), (SWY) Macke Owns (SWY) Finerman Owns (AAPL), (CAT), (HOV) Finerman's Firm Owns (DJ), (TOL), (USG), (WMT), (BJ); S&P Puts, Finerman's Firm & Finerman Own (TYC), (HD), (FLS); CNBC Is A Service Of NBC Universal And Dow Jones