Insights 
VT 
Trade talks between the US and China took place over the weekend in Madrid. The meeting has concluded, with details yet to be disclosed.
An update regarding the discussions was posted on TikTok. Further insights are expected from the read-outs.
Market Expectations
With talks in Madrid having just ended and no official details yet, we should expect a sharp increase in market volatility. The CBOE Volatility Index, or VIX, has already crept up to 19 this past week in anticipation, and derivative markets are pricing in larger-than-usual price swings for the coming weeks. This uncertainty means traders should consider buying options to protect their portfolios or speculate on a large move.
We have seen this scenario play out before, particularly during the trade negotiations between 2018 and 2020. Back then, markets would swing wildly based on headlines and rumors, punishing anyone who made a large bet before official news broke. History shows that even positive announcements can be followed by sell-offs as traders digest the fine print, making immediate bullishness a risky play.
Attention should turn to options on sector-specific ETFs that are highly sensitive to US-China relations, such as those tracking semiconductors and Chinese tech stocks. For example, implied volatility is elevated for options on the FXI, the China large-cap ETF, suggesting traders are preparing for a significant move. We should focus on strategies like straddles or strangles that can profit from a sharp price change in either direction, rather than guessing the outcome.
Options Trading Considerations
The broader economic picture complicates things further, as this isn’t happening in a vacuum. The latest US inflation report for August 2025 came in slightly hot at 3.1%, limiting the Federal Reserve’s ability to support the market if the trade news is bad. At the same time, China’s recent industrial production numbers showed a weaker-than-expected 3.5% growth, indicating they also need a positive result from these talks.
For now, the prudent move is to use derivatives to define risk rather than make outright directional bets. This means favouring long premium strategies where the maximum loss is known upfront. The immediate focus is on surviving the initial news release, which could come at any moment and likely outside of market hours.
