North America’s big stock indexes are in the process of correcting following a powerful rally from the March bear-market lows. Typically, a correction from a previous high takes a market down about 10% before technical support brings buyers back in.

Canadian and US markets are now approaching that support zone. The S&P/TSX Composite Index has dropped 9% from its June high, and the S&P 500 Composite Index has shed 7%.

Aggressive short-term traders might consider establishing bullish positions in optionable exchange-traded broad-market ETFs, in anticipation of an end to the correction phase and a bounce off the support levels.

Underlying ETFs would include some of the old standbys, like iShares Cdn S&P/TSX60 Index Fund (TSX: XIU; down 9% from its recent high), iShares CDN Composite Index Fund (TSX: XIC; down 9%), and for sector exposure, perhaps iShares CDN Materials Sector Index Fund (TSX: XMA; down 13%).

During this sell-off, the volatility implied by index options has expanded. Note implied volatility on XIU options has risen from 23.72% to 30.06%. Not surprising really, as traders tend to price in greater risk during market declines. Although intuitively, one would think the opposite to be true.

In any event higher option premiums suggest that option writing strategies may be the best way to exploit a bullish position. Writing for example, index puts with strikes slightly below current levels. For example, writing the XIU August 14.50 puts at 50 cents or better. With XIC, bullish investors might look at writing the August 15 puts at 50 cents or better. Bearing in mind, of course, that the liquidity – and the bid asked spread - on XIC options is far greater than you would get trading XIU options.

As for XMA, I would argue that the same caveat exists. The August 14 puts would seem to be the appropriate option to write, but at the close of trading on Friday, these puts were bid
55 cents offered at 80 cents. If you write these puts, set a limit at 70 cents or better.