The new US tariffs are the first results of a trade agreement, with a cap set at 15%. This move aims to provide more stability for businesses, helping EU exports become more competitive. Right now, this setup is a temporary measure to facilitate ongoing negotiations. It is not a full trade deal, and the EU has made this clear. The 15% tariffs are only a short-term solution, similar to past agreements between the US and China.

Potential Deterioration

There is a chance that the situation could worsen if the EU continues to see the agreement as unfair over time. However, the EU might choose to wait until the end of Trump’s term before making any decisions. As of August 1, 2025, the new US-EU trade framework with its 15% tariff cap is bringing a brief period of calm. For derivative traders, this means that implied volatility on trade-sensitive stocks, particularly in the European automotive and industrial sectors, is likely to decrease in the coming weeks. The VSTOXX index, Europe’s main volatility measure, has already fallen by 5% in the last week due to this news, showing the market’s short-term relief. With this expected stability, strategies that benefit from lower volatility, like selling covered calls or credit spreads on European ETFs like the FEZ, could be advantageous. The clear 15% tariff limit eases one significant source of uncertainty, making it easier to predict a trading range for these assets. This strategy allows us to collect premiums while the market adjusts to the current friendly relationship between the two economic regions.

Lessons From Past Trade Disputes

Yet, we must remember the lessons learned from trade disputes between 2018 and 2020, when market sentiment could change rapidly. The current deal is temporary, meaning this stability is delicate and could fall apart later this year or in early 2026. Therefore, while we take advantage of the current calm, we also seek low-cost ways to protect ourselves against a potential breakdown in negotiations. Looking ahead, it may be smart to purchase longer-dated protection, such as out-of-the-money put options expiring in six to nine months. Recent data from German industrial output showed a slight 0.2% increase, highlighting the EU’s economic vulnerability to future trade disruptions. These longer-term options serve as insurance if the EU decides the deal is unfair or if political tensions arise again. The political aspect, suggesting that the EU might be waiting out the current US administration, adds another layer to consider. This means that while the next few months may be calm, volatility could surge around significant political events in the lead-up to the next election cycle. We’re paying close attention to political polling numbers to help time our long-term volatility trades. Create your live VT Markets account and start trading now.

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