One trader has a way to hedge the market in case of more downside

Stocks were creeping higher Friday, erasing some of the losses suffered a day earlier.

Markets aren't in the all-clear, warns Ascent Wealth Partners managing director Todd Gordon. He sees a stark divide between the tech-heavy Nasdaq and broader S&P 500 that could point to more downside to come.

"We're seeing a pretty historic divergence right now between technology and the broader market," Gordon told CNBC's "Trading Nation" on Thursday. "In fact, we haven't seen such an extreme in terms of ratio in the relative strength of the Nasdaq to the S&P since the 2000 top."

Gordon does not see a potential 2000-like bubble in the making but does highlight that that divergence could portend more weakness for the S&P 500.

"What are the chances that we might see a little bit of a pullback here in the S&P? I think it's possible. I am by no means making a long-term bearish statement here but in the near term, this overbought status with technology could start to come off here," said Gordon.

Gordon said a way to play the more downside could lie with the VIX volatility index.

"The volatility index basically measures how expensive the at-the-money puts and calls are in the S&P 500. The higher the VIX, the more expensive options are, which generally means the more uncertainty and fear there is of extreme price movement going forward," said Gordon.

To take advantage of the potential for a prolonged period of higher volatility, Gordon is buying the VIX 35 call strike with Aug. 19 expiration and selling the 40 call strike.

"It's a $105 per spread. You could potentially make $395 if that works perfectly, going right up to the 40 strike," he said.

The VIX was trading above 28 on Friday. It reached as high as 85 in March.


Source: Read Full Article