Inauguration occurs on Tuesday. A massive stimulus package on Wednesday? Well… let’s say a Plan emerges within the first ten days.

Spending a trillion dollars will stimulate the economy. The extent of which will depend on whether it can be surgically embedded into the economy in a way to produce the greatest ripple effect. What you want is enough of a ripple to reignite the economy. But not enough to create an inflationary tsunami.

Don’t be surprised to see North American equities move sharply as the Plan surfaces. The question is how far will the markets go, and which direction?

The latter is the wild card. You can speculate on direction, but in this environment, be ready to move quickly.

Playing volatility is another approach. Take direction out of the equation with a straddle, which is a strategy where you simultaneously purchase a call and a put. It is not about direction, it is about the market moving sufficiently to overcome the cost of buying two options.

Straddles are less expensive than a month ago. But at today’s level, they still require a substantial move in the underlying security.

Take the Canadian market as a case in point. With XIU at $13.60 (Friday’s close) an at-the-money (i.e. $13.50 strike) February straddle would cost $1.62. (Feb 13.50 call at 0.84, Feb 13.50 put at 0.78).

The XIU implied trading range through the February expiration is $15.12 to the upside or $11.88 to the downside. The bottom end of that implied range coming suspiciously close to the 52 week low (the low was $11.60) of November 21st, 2008.

From a strategy perspective, XIU does not have to move to the extreme edge of the trading range for the straddle to be profitable. If Canadian stocks were to decline sharply, we should see a spike in volatility. That would translate into an increase in the premium for both the call and the put. Which is to say, the straddle could be worth more than you paid for it, simply because of the spike in volatility.