Positioning for Volatility
The US Supreme Court is set to expedite its review of tariffs imposed during Trump’s presidency, starting in November. Until the Supreme Court reaches a decision, the tariffs will continue to be enforced.
The focus of the case is Trump’s appeal against a federal court decision. This decision previously ruled that the tariffs exceeded his presidential authority. The Supreme Court’s upcoming hearing in November will address these arguments.
With the Supreme Court waiting until November, we’re looking at a solid two months of uncertainty, which is where we thrive. The tariffs staying in place for now provides a floor, but the real play is on the expected volatility. We should be looking at buying VIX calls or VIX futures dated for late October and November, as the market will start pricing in binary outcomes as the hearing dates approach.
This news directly puts pressure on industrial and manufacturing sectors that rely on international supply chains. We should be structuring option strategies on ETFs like XLI (Industrial Select Sector SPDR Fund) and specific names like Caterpillar that were sensitive to the trade war back in 2018 and 2019. Buying straddles or strangles allows us to profit from a big move in either direction without having to guess the court’s decision.
We must also watch the currency markets, particularly the Chinese Yuan. The USD/CNY exchange rate, which has already seen volatility this year and is currently hovering around 7.4, will react strongly to any speculation about the tariffs being struck down or upheld. Options on currency ETFs like CYB are a direct way to trade the building tension between now and the arguments in November.
Impact on Agriculture
Let’s not forget the agricultural markets that were whipsawed during the initial tariff implementations. Soybean futures, in particular, saw their prices collapse over 20% in just a few months during the 2018 trade conflict when Chinese buyers disappeared. We can expect significant movement in futures contracts for soybeans and pork as lobbying groups from these sectors make their voices heard over the coming weeks.
The key is to position for the ramp-up in implied volatility over the next several weeks, not just the event itself. We saw implied volatility on some of the most-affected stocks jump by over 30% in the month before major tariff deadlines in the past. Getting into these positions now, while the market is just beginning to digest the timeline, is the most logical response.
