The French foreign affairs minister has shared thoughts on the US-EU trade deal, stating it will provide temporary stability. However, the European view sees this agreement as only a short-term fix.

Exempt Sectors and Market Balance

Some French sectors, like aeronautics and spirits, are set apart from the deal. Still, the overall arrangement feels unbalanced. This temporary deal may last for a few months or until the end of Trump’s presidency. While we have avoided the worst-case scenario, uncertainties about how the market sees this deal remain. People are wondering if it will ultimately be viewed in a positive light. The minister’s remarks suggest a brief period of calm, not a permanent solution. This creates a misleading sense of security, as the market’s real volatility might be overlooked. Therefore, derivative traders should focus on strategies that benefit from future uncertainty rather than relying on the short-term stability offered by this agreement. The CBOE Volatility Index (VIX), which measures expected market fluctuations, has recently stayed in the lower range of 13-15, reflecting this temporary relief. However, VIX futures show that contracts set to deliver in the coming months are priced higher, above 17 later in the year. This suggests that while things are calm now, the market expects increased volatility when the minister indicates this deal’s stability may fade.

Opportunities in Derivative Strategies

Given this situation, we see a chance in buying longer-dated call and put options on major market indices like the S&P 500 or the Euro Stoxx 50. Buying these options now, while their implied volatility is low, is more affordable than waiting for political tensions to rise again. This approach helps traders prepare for significant market shifts in the months ahead. Historically, periods of political calm have often led to sharp spikes in volatility. For example, during the US-China trade tensions in 2019, the VIX surged from below 15 to over 25 after seeming progress crumbled. This pattern suggests that the current stability is fragile and likely temporary. Even though specific sectors like aeronautics are momentarily protected, their long-term outlook remains linked to the imbalanced agreement mentioned by the minister. Thus, we are looking at protective puts on companies vulnerable to transatlantic trade, even those currently exempt. This is a smart way to hedge against potential issues with the deal later this year. More advanced strategies, like calendar spreads on major indices, might also be effective. This involves selling a short-term option to collect premiums from the current low-volatility environment, while buying a longer-term option to benefit from future uncertainty. This approach specifically caters to the kind of temporary stability we’ve been discussing. Create your live VT Markets account and start trading now.

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