The EU Trade Commissioner, Sefcovic, will talk with the US Trade Representative, Greer, this evening. The EU has stated that no trade countermeasures will be implemented before August 1. German Chancellor Merz is pushing for a quick resolution and is in close contact with Trump and Von Der Leyen. Although the EU is not taking countermeasures at this time, they are ready to act if needed.

Market Reactions To Tariffs

The market has largely ignored the threat of a 30% tariff on the EU, thanks to the August 1 deadline. Initially, markets fell but then rebounded, as they are used to Trump’s threats. Many expect that deadlines will extend and agreements will eventually be reached. Trump’s threats seem ineffective unless he imposes tariffs immediately, which could upset the market and lead to retaliations. The market’s relaxed response is a signal for us. While cash traders are buying dips based on reassurances from Merz and the EU spokesperson, the derivatives market provides a smarter strategy. Current complacency from “TACO trade” fatigue has lowered implied volatility. For example, the VIX index is hovering around 13, a level that suggests little concern for short-term disruptions. This presents an opportunity.

Mispricing The Probability

We believe the market is underestimating the chance of a policy mistake. Everyone is fixated on the August 1 deadline, expecting a slow, straightforward negotiation between Greer and Sefcovic. The actual risk lies not in scheduled events, but in unpredictable incidents. Between 2018 and 2019, a single tweet could wipe out a week’s worth of gains. During that time, markets averaged a 1.5% drop within 24 hours after a new tariff threat, but today’s complacency is much greater. As a result, we are not interested in the popular strategy of selling volatility. The returns simply don’t justify the risk of a sudden downturn. Instead, we recommend buying inexpensive, out-of-the-money protections. With the VIX remaining low, we see hints of underlying anxiety. The CBOE Skew Index, which gauges demand for protection against unexpected events, has been rising, recently reaching 138. This suggests while many are selling options, a few large investors are buying “lottery ticket” puts, just in case. Our plan for the next two weeks is to take advantage of this disconnect. We will create trades that benefit from a sudden rise in volatility rather than a specific market direction. This means buying August and September call options on the VIX and purchasing far out-of-the-money put spreads on indices very sensitive to this situation, like Germany’s DAX. Right now, the cost of entering these positions is quite low. The market seems to favor a rational Trump, as Von Der Leyen and Merz hope for, rather than an unpredictable leader who uses tariffs disruptively just to show strength. The more the market ignores these risks, the more alert we should be. Create your live VT Markets account and start trading now.

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