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For the first time in many days, weak equity futures have made a slightly lower low on the daily chart this morning for both the S&P and Dow before rebounding. Despite this, implied volatility on August SPX 970 puts, for example, is down 0.9 vol points, giving up part of an almost 3 vol point gain since Mid July and the VIX is only up 0.40 with S&P futures down 9-10 points as of 1 PM, suggesting a belief in some re-tracement of the range traversed during the past month.

Best option ideas for playing the downside in the equity markets with limited risk include buying Sep/August calendar put spreads struck OTM in indices or ETFs. For example, the Sep/Aug 47 put spread in XLE can be bought for about 0.60, where Sep implied vol is 1.8 vol points below August. This will benefit from a move over time toward $47, collect on theta, and possibly benefit from long vega and vol spread converging. Another idea is to put on August 1×2 put spreads in indices with low ATM vol and relatively high put skew.

The bank sector, i.e. BKX, has been showing great relative strength in recent days and implied volatilities have declined relatively more in that sector as downside is now seen as limited. We took profits on bullish options trades in BAC today which broke out of resistance but is technically stretched, looking to re-enter at a slightly better level.

Treasuries held support on the 10yr note (TNX Index) around 3.75% yield and technically target 3.59-3.60% and possibly 3.50%. Can play this through bullish fixed-income ETF trades. Note that although TLT has realized 22 vol in the past 20 days, it is confined to defined technical ranges and OTM option premium can be sold against directional trades to enhance return.