Maximum power creates maximum volatility.
That seems to be the key market takeaway of President Donald Trump’s initial implementation of his Make America Great Again agenda on the international stage.
His decision to levy 25% tariffs on Mexico and Canada plunged markets into a deep decline on Monday. The market staged an intraday recovery after Mexico’s and Canada’s leaders agreed to Trump’s 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.
The options market isn’t waiting to find out. A MAGA volatility premium exists beneath the options market’s surface.
A recent Goldman Sachs analysis of stocks that comprise the S&P 500 index revealed that realized and implied volatility—the essence of options pricing—are 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.
The volatility’s 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.
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.
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.
The simplest trade is to buy blue-chip stocks when Trump’s 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.
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 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.
If the stock price exceeds the strike price at expiration, put sellers can keep the options premium. The amount often exceeds the stock’s dividend. If the stock is below the strike at expiration, they must buy the stock or adjust the put to avoid assignment.
The risks seem reasonable, but experience with cash-secured put sales—one of the most popular options strategies for many years—may be irrelevant, given the uncertainty surrounding Trump.
Indeed, the market’s reaction to Mexico and Canada probably isn’t an accurate indication of how it will process Trump’s 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’s demands.
Xi Jinping, China’s leader, may have anticipated all this. In October, when observing the 75th anniversary of the founding of the People’s 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.
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—like the one outlined above—are best amid MAGA volatility. The world is in motion, and there is much more to be learned.
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Trump Just Made Options Trading Trickier Than Ever. What to Do Now.
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Disclosure: Options (with multiple legs)
Options involve risk and are not suitable for all investors. For information on the uses and risks of options, you can obtain a copy of the Options Clearing Corporation risk disclosure document titled Characteristics and Risks of Standardized Options by clicking the link below. Multiple leg strategies, including spreads, will incur multiple transaction costs. “Characteristics and Risks of Standardized Options”
