The stock market’s advance since mid-March has been powerful. It has also gone on for about five weeks. Economic and financial fundamentals, including rising unemployment, below capacity manufacturing, and stubbornly wide credit spreads suggest that the March rally is largely sentiment-driven. Albeit on some positive financial reports from big US banks like Citigroup and Wells Fargo.

The rally is probably not sustainable in its current form. That is rising without any type of near term pullback. The larger risk is the potential of a sharp, near-term reversal, especially if first-quarter earnings reports do not live up to advance billings.

The other consideration is the MX Implied Volatility Index which has been declining over the past five weeks. That’s not surprising, as volatility tends to subside when traders become less concerned about risk. Nothing like a rising market to leave one with the perception that risk has been mitigated.

The point is, option premiums while not cheap, do lay the foundation for option buying strategies. Either to profit from a continued upsurge in the market, or to take advantage of a near term correction or reversal.

One strategy to consider is the purchase of straddles. Particularly on the iShares CDN S&P/TSX 60 Index Fund (TSX: XIU). For example, with XIU trading at $14.07, you might consider the XIU May 14 straddle for $1.50 per share. This position is profitable, if at expiration, XIU is above $15.50 or below $12.50.

Of course, XIU does not have to breach the trading range implied by the May 14 straddle. There are possibilities where the straddle can be profitable at points before expiration. For example, a sharp move up or down by the underlying security, or a change in the volatility assumption attached to XIU.