The European Union (EU) is getting ready to take trade retaliation steps against the United States, even if a deal seems close. This response comes from concerns that the US might raise tariffs on EU products, as stated by two diplomats in a report.

EU’s Retaliatory Measures

The EU has created retaliation plans that can be quickly activated against the US. These plans do not need long discussions among member countries and could be put into action fast. Under this agreement, tariffs could go up to 30% on €93 billion worth of US goods, possibly starting from August 7. If a deal is finalized with the US by August 1, these countermeasures will be paused. This strategy aims to ensure a quick response if talks between the EU and the US do not work out. We expect the August 1 deadline to bring market fluctuations. There are two possible outcomes: a relief rally if an agreement is reached, or a sharp decline if talks fail. This situation makes holding long volatility positions an appealing strategy in the upcoming weeks. With current market stability—highlighted by the CBOE Volatility Index (VIX) trading below the 15 mark—options are relatively cheap. We see this as a sign of complacency amidst a significant geopolitical risk. Buying call options on the VIX or its European counterpart, the VSTOXX, could yield profit if rapid retaliation happens.

Preparing for Volatility

We are also preparing for a possible drop in stock markets using index options. The proposed tariffs on €93 billion worth of goods would directly affect company profits, making put options on the S&P 500 and the Euro Stoxx 50 a smart hedge against the tariff risks mentioned by our diplomatic sources. Historically, markets do not react well to such escalations, similar to the 2018 US-China trade war that caused significant market declines. We believe the market is underestimating the chance of a negative surprise. Fast-tracking countermeasures without extended discussions raises the likelihood of a sudden market shock. The currency market, especially the EUR/USD exchange rate, will also be affected as the deadline approaches. If no deal is made, it could put pressure on the euro as investors anticipate economic harm to the EU. Thus, we are considering options strategies that would benefit from a decrease in the EUR/USD exchange rate. Lastly, we are exploring sector-specific derivatives. European car manufacturers and American agricultural and spirits exporters are likely targets based on past disputes. Buying put options on ETFs that represent these vulnerable sectors could provide a focused way to capitalize on the potential outcome. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now