The market is showing a number of subtle signs of recovery the last few weeks and today was a very big day from an economic perspective. Yield spreads are beginning to normalize, or at least hit levels not seen since the start of the credit crisis last year. Yield spreads will become very wide when liquidity, or market participation is drying up, which is exactly what had been happening during the credit crisis.

The fact that they are now beginning to narrow is a sign (and a good one) that banks are having an easier time moving capital.

Durable goods orders also came out today with a big surprise to the upside for stock investors. Orders for products that last longer than a year were up more than expected, which helped bolster stock index prices. Specifically, this could be a very good sign for large cap stocks and stock indexes.

When you put factors like this together over a few weeks, what you get is an improving risk environment, or lessened fear. You can see a chart of the VIX or “market fear index” below and in the video for this article that illustrates this decline in fear over the last few weeks. When investors become less fearful they look for better returns and higher risk investments like stocks.

VIX or Market Fear Index – Showing a decline in investor fear.

Fear is declining now, but what can you do in a volatile market to reduce risk when you are long a stock market ETF like the SPY (S&P 500 index) or several individual stocks in a portfolio?

One of the things we talk about in our Finding Options Trades course is covered calls. They offer coverage against risk by pulling some volatility out of your portfolio without reducing very much of the upside, and at a relatively low cost.

In the video below I will also walk through a specific example of applying a covered call against a long position on the SPY or S&P 500 ETF.

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3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved."