Mike Khouw's S&P 500 Hedge

On CNBC's Options Action, Mike Khouw suggested that investors should consider a hedge in the S&P 500, now when the market is approaching all-time highs. He wants to be protected until January, because he wants to cover the Fed interest rate decision, holiday season and the Star Wars release. Khouw thinks that the best way to buy a protection from a market decline is by purchasing a put spread in SPDR S&P 500 ETF Trust SPY. Specifically, he wants to buy the January 209 put for $5 and sell the January 189 put for $1. The put spread would cost him $4 or 2 percent of the value of the underlying and he would be protected below $205. He can maximally gain $6 with this trade. SPDR S&P 500 ETF Trust is going to issue a dividend between now and expiration, which is going to decrease the cost of the hedge, said Khouw.