Positioning for Volatility

The US Supreme Court will quickly review the tariffs from Trump’s presidency starting in November. Until they make a decision, the tariffs will remain in place. This case centers on Trump’s appeal against a federal court ruling that stated the tariffs went beyond his presidential power. The Supreme Court’s hearing in November will consider these arguments. With the Supreme Court’s decision still two months away, we have a period of uncertainty, which is where we excel. The ongoing tariffs create a safety net, but the real opportunity lies in the volatility we expect. We recommend buying VIX calls or VIX futures for late October and November, as the market will anticipate big changes as the hearing dates get closer. This news puts pressure on industrial and manufacturing sectors that depend on global supply chains. We should create option strategies using ETFs like XLI (Industrial Select Sector SPDR Fund) and specific companies like Caterpillar, which felt the impact of the trade war in 2018 and 2019. Using straddles or strangles allows us to benefit from significant price movements in either direction without needing to predict the court’s outcome. We also need to monitor the currency markets, especially the Chinese Yuan. The USD/CNY exchange rate, which has been volatile this year and is around 7.4, will respond sharply to any speculation about the tariffs being changed. Options on currency ETFs like CYB offer a direct way to trade the rising tension leading up to the November arguments.

Impact on Agriculture

We must also consider the agricultural markets that were greatly affected when the tariffs were first implemented. Soybean futures, for instance, dropped over 20% within months during the 2018 trade conflict as Chinese buyers vanished. We can expect notable fluctuations in futures contracts for soybeans and pork as advocacy groups from these sectors make their concerns known in the coming weeks. The goal is to prepare for an increase in implied volatility over the next few weeks, not just the event itself. In past instances, we’ve seen implied volatility for heavily impacted stocks surge by over 30% in the month leading to major tariff deadlines. Entering these positions now, while the market is just starting to understand the timeline, is a smart approach. Create your live VT Markets account and start trading now.

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