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If stocks fall, here’s one way to hedge against the downturn: Trader

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A TLT trade.

That's one way to hedge against another potential leg lower for U.S. stocks, Todd Gordon, managing partner at Ascent Wealth Partners, told CNBC's "Trading Nation" on Tuesday.

"We're seeing unbelievable movements here in the commodities markets," Gordon said, referencing the unprecedented plunge and subsequent comeback in the price of U.S. crude oil this week as well as the weakness in copper prices.

"We're seeing a lot of demand falling coupled with too much supply, specifically in crude oil, creating some deflationary forces here," he said. "When you have deflationary forces, markets turn to safety. They turn to safety instruments."

One such instrument is the iShares 20+ Year Treasury Bond ETF (TLT), which tracks long-term U.S. Treasury bonds, Gordon said. Bonds trade inversely to their yields.

With the TLT brushing up against the $170 levelΒ β€” the ETF traded down about 1% on Wednesday to just above $169Β β€” "I don't see a reason, with the current theme and the trends that we're seeing right now, that we wouldn't be able to go up and retest the highs here at 180," Gordon said.

"If you're a little bit more of an agile, short-term trader," trading options on the TLT is one way to capitalize on that possibility, he said.

Gordon suggested looking out to the May monthly options, buying the $170 strike call and selling the $180 strike call, a $10 spread that cost just more than $3 at the time of his trade. The trade represents a bullish bet with defined risk, containing the downside if the TLT slips below $170 and profiting if it does regain its old highs around $180.

"With commodities falling, we have demand destruction coupled with oversupply," Gordon said. "If we see stock indexes start to roll over, this should be a nice way to hedge on the upside. We are potentially looking at negative rates here in the U.S., and TLT should continue higher if that's in fact our fate in U.S. fixed income markets."

His final word of advice? Position-size accordingly.

"I usually position-size such that I have half of that premium that I'm going to pay at risk. So, if my $3 spread that I'm about to purchase goes down to about $1.50, cut it," Gordon said. "Contain the risk and move on."



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