Headlines abound about the stock markets turnaround since bottoming in March. Presumably reflecting the end of the worst recession since the 1930s, and a Cinderella like return to prosperity.

Less noticeable has been the mirror image decline in volatility as measured by the MX Implied Volatility Index (symbol MVX). The downward spiral has taken the MVX from 78% levels seen last October to current levels just under of 24%. Suggesting that risk in the market has returned to some sort of baseline.

While Cinderella and Prince Charming lived happily ever after, you cannot help but think there were some tremors along that road to happiness. And I am not talking about the potholes the pumpkin carriage may have encountered on the way home from the Ball.

In the financial markets, there is a litany of potential shocks from rising vacancy rates in US commercial real estate, to burgeoning government debt that could lead to inflationary spikes the likes of which we have not seen since the 1970s.

You could also argue that the so-called green shoots supporting the view the recession has ended, are simply the result of a wand waving fairy godmother granting consumer wishes in the form of government largesse. And maybe living in the fairy tale atmosphere that is global politics, that may be enough. If this recession was really nothing more than a crisis of confidence, anything that simulates excess consumption, may be enough to weaken the back end of a perfect storm.

The problem in the real world is that perfect storms are exactly that! You get the initial thrust, settle into the eye and await the back half. And to my way of thinking, where we are, looks suspiciously like the eye of a storm.

Technically speaking, you cannot help but notice that each new high on the US financial markets has come on the back of steadily declining volume. Could this indicate a return to volatility, once trading season resumes in earnest after the summer hiatus? Certainly there is enough here to suggest some form of preventative action in light of the historically strong gusts that traditionally accompany trading in September and October.

And while you might feel smug about the prospects of the Canadian economy, we will not escape any hurricane force fall winds blowing up from the US. You can expect in this perfect storm scenario, that exchange-traded funds like the iShares S&P TSX 60 index fund (symbol XIU, recent price $16.59) will feel the pressure. The cost of buying XIU October 16 puts at 45 cents seems like a reasonable cost for storm insurance.

Another approach, if you think these shoots are really green, is to look at strangles. A strangle involves the purchase of a call and a put option on the same underlying security but with different strike prices. As such, you are not as concerned about the direction of the market, only that it moves more than the cost of the two option contracts.

It is difficult to imagine under any end of recession scenario, we will escape potential potholes along the way. A rising market with potholes will most certainly increase volatility. Making strategies like the strangle appropriate from a couple of perspectives: 1) it removes directional bias from the equation and 2), it will benefit from spikes in volatility that accompany short term corrections.

Using XIU as the underlying security, you could purchase the October 16.50 calls at 60 cents and the October 16 puts at 45 cents for a total cost of $1.05. You profit if XIU is above $17.55 or below $15.45 by the October expiration.

You also benefit from interim spikes in volatility, should we get exposed to some of those potential potholes. A spike in volatility will push up the value of both the call and the put, which could make the XIU strangle profitable without breaching either end of the trading range.