U.S. and Chinese negotiators are meeting in Stockholm on Monday to discuss extending the August 12 deadline for a trade deal. A 90-day extension is likely, which would stop tariffs from increasing to 145% for the U.S. and 125% for China. This is the third round of talks, led by U.S. Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng. The goal is to extend the tariff truce to avoid major tariff spikes that could disrupt global supply chains.

U.S.-EU Trade Deal Influence

The talks come after a recent U.S. agreement with the EU, which includes a 15% tariff rate and significant European purchases of U.S. goods, along with a $600 billion investment promise from the EU. While no major breakthrough is expected with China, a 90-day extension could pave the way for a summit between Trump and Xi in late October or early November. Sources say both sides will likely refrain from imposing new tariffs or taking escalating actions during the extension. Despite Trump expressing optimism about a deal with China, reports indicate that new U.S. tariffs on Chinese goods are being planned. Previous negotiations were held in Geneva and London this year. Given the high likelihood of a 90-day extension, derivative traders may want to prepare for a short-term decrease in overall market volatility. The VIX index, which measures market fear, has been in the low-to-mid teens, but a formal announcement from the Stockholm meetings could push it down even more. This suggests that selling near-term index option premiums, such as through short straddles or iron condors, could be profitable. This approach is tactical rather than strategic, as the truce merely postpones major risks until the fourth quarter. Data from the 2018-2019 trade war indicates that markets usually relax after a truce is announced, but volatility tends to increase as the new deadline nears. Thus, we recommend focusing on options expiring in September to avoid exposure to the uncertainties that will rise as October approaches.

Sector-Specific Volatility Opportunity

While the general market may be calm, there is potential for sector-specific volatility. Reports of new tariffs being prepared for Chinese semiconductors and pharmaceuticals indicate that these sectors will remain unstable, regardless of a broader truce. The VanEck Semiconductor ETF (SMH) has already shown significant price fluctuations over the past quarter, and we expect this trend to continue, making long volatility strategies in specific sectors a wise hedge. The main risk to this outlook is a complete breakdown in talks, which would undermine the low-volatility prediction. While this is unlikely, if tariffs were to rise above 100%, it would trigger a severe market reaction. Therefore, it is wise to maintain a modest, inexpensive hedge, such as long-dated VIX calls or out-of-the-money puts on the S&P 500, to safeguard against any unexpected failures from the discussions led by Bessent and He. Create your live VT Markets account and start trading now.

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