The markets remain “choppy,” as the saying goes, gyrating quickly through gains and losses on low summertime volume, which tends to exaggerate swings. It’s best not to read too much into this type of activity. Second-half economic weakness had been widely predicted (including in these notes) in the first half of the year.

Still it’s difficult to bet on the sustainability of any trend. Mainly because there hasn’t been one! Stocks gyrate through gains and losses very rapidly in this environment, subject to swings in sentiment. Fundamental analysis founders on the shoals of uncertain earnings outlooks. Will it be inflation or deflation? Slow growth, no growth, or double-dip? It’s all on the table, and there’s no consensus… except perhaps, the very low probability of a double dip.

You could argue that markets have already discounted a slowdown. Note the persistent bearish bias since April. You could also make a case that mean reversion is the foundation for a choppy environment. Which, given the deeply pessimistic predilection driving investor decisions, suggests an upside surprise in the fall.

So, how can options traders profit from this type of trading environment? We know that rapid rallies and steep corrections lead to higher than average premiums. Leading one to look first at option writing strategies that generate cash flow in a range bound market. You could certainly look at writing covered calls or cash secured puts on sectors that will be hit hardest in a slow growth environment. Sectors like energy, materials and to a lesser extent, consumer staples come to mind.

One possibility for a short-term gain could be long calls on Canadian financials. The iShares S&P/TSX Capped Financials Index Fund (TSX: XFN, recent price $21.09) has been encountering support near its 52-week low. Even if it isn’t a true bottom, the bounce that took place on Friday may have a way to go to the upside. Look at buying the XFN Oct 21 calls at 70 cents. This is a short term trade, which traders should look to exit if the calls rally above $1.25.

You could also look at some of the individual banks that are included in XFN. For example, the big five Canadian banks make up 68% of the total XFN portfolio. As go the big five, so goes XFN.

Given the positive upside earning surprises delivered by CIBC (symbol CM, recent price $71.99) and Toronto Dominion (symbol TD, recent price $71.78), you might look at long calls on either bank. The CM Oct 72 calls at $1.85 look interesting as do the TD Oct 72 calls at $1.90. As with XFN, these are short term trades that you should look to exit if either call doubles.