The second day of talks between the US and China ended with both sides describing the discussions as open and productive. Li, China’s chief trade negotiator, mentioned that both teams continued to use the trade consultation mechanism. They recognized the importance of keeping healthy and stable relations between the two countries. They had in-depth discussions on macroeconomic issues and reviewed the implementation of the Geneva consensus.

Trade Truce Extended

China and the US decided to extend the trade truce, which means they will pause reciprocal tariffs and any countermeasures from China. Both parties pledged to keep communicating. This extension of the trade truce is a major step back from conflict. It helps reduce market worries, likely reducing the VIX from its recent highs near 17 to the 13-14 range. This suggests a calmer trading period in the weeks to come. With implied volatility expected to decrease, there are opportunities to sell options. Strategies like covered calls on current stocks or selling cash-secured puts on stocks we want at lower prices become more appealing. The aim is to benefit from the decline in option prices in a less volatile market.

Impact On Markets

We anticipate a relief rally in sectors heavily affected by trade tensions, particularly semiconductors. The VanEck Semiconductor ETF (SOXX), sensitive to trade news, could see a significant rise. We might consider purchasing short-dated call options to take advantage of this possible increase. Agricultural commodities, seen as tools in the trade dispute, should also gain. We expect increased Chinese purchases could lift November soybean futures (ZS1!), which have been trading within a narrow range. Historically, even a hint of a truce has led to double-digit rallies in soybean prices over a few weeks. This stability could also positively affect Chinese stocks, which have struggled due to economic uncertainty. The Hang Seng Index (HSI) might reach its year-to-date high as global investments return to the region. Using options on major Chinese ADRs or ETFs like FXI offers a good way to invest in this. However, we should remember that this is just a pause, not a complete solution to geopolitical issues. While we are selling near-term volatility, it may be wise to maintain some long-term protection in our portfolio. The core disagreements remain, meaning volatility could easily return later this year. Create your live VT Markets account and start trading now.

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