{"id":218432,"date":"2025-02-07T10:15:00","date_gmt":"2025-02-07T15:15:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=218432"},"modified":"2025-02-10T03:38:39","modified_gmt":"2025-02-10T08:38:39","slug":"trump-just-made-options-trading-trickier-than-ever-what-to-do-now","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/options\/trump-just-made-options-trading-trickier-than-ever-what-to-do-now\/","title":{"rendered":"Trump Just Made Options Trading Trickier Than Ever. What to Do Now."},"content":{"rendered":"\n

Maximum power creates maximum volatility.<\/p>\n\n\n\n

That seems to be the key market takeaway of President Donald Trump\u2019s initial implementation of his Make America Great Again agenda on the international stage.<\/p>\n\n\n\n

His decision to levy 25% tariffs on Mexico and Canada plunged markets into a deep decline on Monday<\/a>. The market staged an intraday recovery after Mexico\u2019s and Canada\u2019s leaders agreed to Trump\u2019s demand to secure the border. Tariffs were suspended for 30 days, though it is unclear if, in the interim, other countries beside China will also be slapped with tariffs.<\/p>\n\n\n\n

The options market isn\u2019t waiting to find out. A MAGA volatility premium exists beneath the options market\u2019s surface.<\/p>\n\n\n\n

A recent Goldman Sachs analysis of stocks that comprise the S&P 500 index<\/a> revealed that realized and implied volatility\u2014the essence of options pricing\u2014are near the highest levels of the past year. One-month realized volatility for the average S&P 500 stock is 33%, and implied volatility is 31%, representing the 94th and 84th percentiles, respectively, over the past year.<\/p>\n\n\n\n

The volatility\u2019s steepness is surprising. Trump is a pro-market president, the U.S. economy is strong, and corporate earnings are robust. All of that usually equates to lower equity volatility.<\/p>\n\n\n\n

High volatility suggests that the markets, which are accustomed to deferential treatment from everyone, even world leaders, are struggling to price Trump. No meaningful historical framework exists to evaluate an American president with maximum power and a maximum disdain for historical norms.<\/p>\n\n\n\n

Investors face an interesting predicament. They can do nothing until a definitive Trump pricing pattern emerges, or they can trade the first MAGA volatility wave.<\/p>\n\n\n\n

The simplest trade is to buy blue-chip stocks when Trump\u2019s actions push stocks lower. The trade expresses the belief that buying quality stocks when prices are falling is good because the future rewards patient investors.<\/p>\n\n\n\n

Aggressive investors who are comfortable with options can supercharge this approach and get the options market to pay them to buy stocks. When stocks decline because Trump has said or done something that bullies stocks, investors can sell cash-secured put options<\/a> with strike prices just below the price of their favorite stocks. Other investors are buying puts to hedge stocks, so selling puts monetizes widespread fear that stocks may decline.<\/p>\n\n\n\n

If the stock price exceeds the strike price at expiration, put sellers can keep the options premium. The amount often exceeds the stock\u2019s dividend. If the stock is below the strike at expiration, they must buy the stock or adjust the put to avoid assignment.<\/p>\n\n\n\n

The risks seem reasonable, but experience with cash-secured put sales\u2014one of the most popular options strategies for many years\u2014may be irrelevant, given the uncertainty surrounding Trump.<\/p>\n\n\n\n

Indeed, the market\u2019s reaction to Mexico and Canada probably isn\u2019t an accurate indication of how it will process Trump\u2019s actualization of his MAGA agenda. Those nations are bit players on the world stage, unlike China, which is unlikely to quickly acquiesce, if at all, to Trump\u2019s demands.<\/p>\n\n\n\n

Xi Jinping, China\u2019s leader, may have anticipated all this. In October, when observing the 75th anniversary of the founding of the People\u2019s Republic, Xi told the nation to prepare for tougher times. He seems, as does Trump, to be willing to endure short-term market pain for long-term political gain<\/a>.<\/p>\n\n\n\n

Investors should prepare for options volatility to keep increasing, and for stocks to decline longer and harder before recovering. This is why simple trading strategies\u2014like the one outlined above\u2014are best amid MAGA volatility. The world is in motion, and there is much more to be learned.<\/p>\n\n\n\n

—<\/p>\n\n\n\n

Trump Just Made Options Trading Trickier Than Ever. What to Do Now.<\/a><\/p>\n\n\n\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

Maximum power creates maximum volatility.
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