Insights 
VT 
U.S. and Chinese negotiators are set to meet in Stockholm on Monday to discuss extending the August 12 deadline for a trade deal. A 90-day extension is expected, which is likely to prevent tariffs from rising to 145% on the U.S. side and 125% on the Chinese side.
This marks the third round of talks between senior negotiators, with U.S. Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng leading the delegations. The focus will be on extending the tariff truce to prevent significant tariff increases, which could disrupt global supply chains.
Us Eu Trade Deal Influence
The talks occur after a recent U.S. deal with the EU, featuring a 15% tariff rate and large-scale European purchases of U.S. goods, along with a $600 billion EU investment pledge. While no major breakthrough is expected in the China talks, a 90-day extension could facilitate a potential summit between Trump and Xi in late October or early November.
Unnamed sources suggest both parties will avoid new tariffs or escalatory actions during the extension period. Despite optimistic comments by Trump about a deal with China, new U.S. tariffs on Chinese goods are reportedly being prepared. Previous rounds of negotiation took place in Geneva and London earlier this year.
Given the high likelihood of a 90-day extension, we believe derivative traders should position for a short-term decrease in broad market volatility. The market’s “fear gauge,” the VIX index, has been hovering in the low-to-mid teens, but a formal announcement from the Stockholm meetings could compress it further. This suggests that selling near-term index option premium, through strategies like short straddles or iron condors, could be profitable.
This is a tactical, not a strategic, play, as the truce simply pushes the major risk catalyst into the fourth quarter. Historical data from the 2018-2019 trade war shows that markets typically relax after a truce is announced, only for volatility to surge back as the new deadline approaches. Therefore, we would focus on options expiring in September, avoiding exposure to the renewed uncertainty that will build heading into late October.
Sector Specific Volatility Opportunity
Despite the expected calm for the general market, we see an opportunity in sector-specific volatility. The reports of new tariffs being prepared for Chinese semiconductors and pharmaceuticals suggest these areas will remain turbulent regardless of a broader truce. The VanEck Semiconductor ETF (SMH), for instance, has already displayed significant price swings over the past quarter, and we anticipate this will continue, making long volatility plays on specific sectors a smart hedge.
The primary risk to this outlook is a complete breakdown in talks, which would invalidate the low-volatility thesis. Although unlikely, the potential for tariffs to snap back above 100% would cause a violent market reaction. For this reason, maintaining a small, cheap hedge, such as long-dated VIX calls or out-of-the-money puts on the S&P 500, is a prudent way to protect against the unexpected failure of the talks led by Bessent and He.
