Something big has happened! There is significant news about tariffs!

What exactly happened? What impact has it brought?

The situation is as follows: On May 28 local time, the U.S. Federal Court ruled that the tariff policy proclaimed by Trump on April 2 under the International Emergency Economic Powers Act (IEEPA) was illegal and permanently prohibited its execution. This means that the added 10% comprehensive tariff and the postponed equivalent tariffs have been fully halted.

The reason for this ruling is that five U.S. companies and twelve U.S. states filed a lawsuit against it (because the tariffs harmed their business operational capabilities), and the basis is:

The Constitution clearly states that the authority to regulate foreign trade belongs to Congress, and the President does not have the right to unilaterally formulate tariff policies. The emergency powers of the IEEPA were originally designed to address national security threats, not to resolve trade imbalances. The trade deficit that has existed for decades does not currently constitute a national emergency. Therefore, Trump's invocation of the IEEPA to impose tariffs based on trade deficit exceeded the authority granted by the Constitution.

After the news came out, the market quickly reacted positively, and the futures of the three major U.S. stock indices surged rapidly, while Gold experienced a sharp decline. $Dow Jones Industrial Average(.DJI.US)$ $Nasdaq Composite Index(.IXIC.US)$ $S&P 500 Index(.SPX.US)$

How will the situation develop? The Trump administration may ultimately appeal to the Supreme Court, and the legal entanglement will continue. However, during this period, the difficulty of restarting tariff policies will be relatively high. If Trump loses, the White House may also try to rely on other legal means, but it is difficult to find a law that provides the president with such broad powers as the IEEPA.

In the short term, due to the impact of this matter, global trade tensions have eased, and market appetite for risk assets has increased. Along with the recent improvement in U.S. economic data, as well as NVIDIA's performance exceeding expectations, many voices in the market indicate that the optimistic sentiment may continue.

Sectors significantly affected by tariffs may welcome opportunities for a rebound, such as Technology (relief of supply chain cost pressures), Consumption, and Autos Manufacturing (stabilization of import prices), while U.S. domestic protectionist companies (such as United States Steel, Agriculture, etc.), along with safe-haven sectors like Gold, may face Bearish influences.

However, in the medium to long term, perhaps the worst of tariffs has passed, but the fluctuations and reversals of tariff policies will be temporarily difficult to eliminate. The U.S. debt crisis has not been resolved, and the delay in rate cuts will also limit the upward space for the stock market, while the global corporate earnings reassessment and supply chain restructuring have not yet reached a stable period.

Various structural contradictions and uncertainties brought by policy games still exist, and attention needs to be paid to the legal processes regarding this matter, various economic data that could influence Federal Reserve policy expectations, as well as tariff situations between China and the U.S. and between the U.S. and Europe after the expiration of tariff exemptions in August.

In this situation, how to effectively use options for both offense and defense?

It can be said that options have always been a good tool for managing volatility, hedging risks, leveraging small amounts into large, and providing both offensive and defensive capabilities. Of course, if used incorrectly, significant losses may also occur. Let's look together at what options strategies can be employed to achieve this balanced approach under the current circumstances.

1. Short-term strategy: Seize the market's excitement.

If the short-term optimistic sentiment continues, US stocks are likely to continue their upward trend. In this case, it may be wise to Buy a call, or use a Bull Spread strategy.

Consider options on US stock index as the symbol, or select individual stocks from Bullish Sectors (for example, Technology sector). Based on the short-term logic, the expiration date chosen should be relatively close (1-2 weeks), and the strike price for the call should not be too high.

Here is a simple example of a Long Call (for educational purposes only; does not represent any investment advice; for convenience in calculation, transaction fees are not included; actual volatility and theoretical value may differ):

Assuming you bought 10 call options expiring on June 6, 2025, with a strike price of $610 at a price of $0.18 when the price was $SPDR S&P 500 ETF(SPY.US)$ at $597, costing $180. Based on a Delta of 0.004, if the SPY price rises by $10 that day, the option price theoretically becomes $22. At this point, selling these 10 options could yield $220, resulting in a profit of $40. Conversely, if the SPY drops by $10, there would be a loss of $40.

*Delta indicates how much the option price changes when the asset price changes by 1 unit.

When trading such short-term options, special attention must be paid to the loss in option price caused by time value decay. Option price = intrinsic value + time value. In simple terms, intrinsic value refers to the value gained during immediate exercise (greater than or equal to 0), while time value is the cost paid for the uncertainty of time. The closer the expiration date gets, the faster the time value decays.

If the expiry date is approaching and the strike price of the options is still far from the underlying asset, the likelihood of the options having intrinsic value at expiration is very low. In this case, timely stopping losses may be a better choice; otherwise, there is a risk of the options becoming worthless after expiration.

2. Short to medium-term strategy: Betting on high volatility during policy game periods.

During the aforementioned period, market sentiment may be very sensitive, and after significant optimism fades, large reverse volatility may also occur. In such cases, some people may use Long Straddle or Long Strangle to capture opportunities for volatility expansion.

Both strategies involve buying a put and a call; the main difference is that Long Straddle usually buys at-the-money options (meaning the strike price of the options is close to the current price of the underlying asset), while Long Strangle buys out-of-the-money options (which means the options have no intrinsic value, with the call strike price above the current price of the underlying asset and the put strike price below it). The former is more expensive but requires a smaller price movement to be profitable.

These two strategies can focus on underlying assets with higher volatility, such as $CBOE Volatility S&P 500 Index(.VIX.US)$ Moreover, when adopting this strategy, it is crucial to pay attention to one aspect: the implied volatility IV, as an increase in IV reflects the market's expectation of greater price volatility for the assets. Other conditions being equal, an increase in IV will lead to an increase in option prices, while a decrease in IV will result in a decrease in option prices.

Since both strategies involve buying options, when considering the risk of IV decreasing, it's best not to operate under circumstances of very high IV. The specific IV of the options can be found on the individual stock > Options Chain > specific options target page > analysis. Overall volatility analysis of individual stock options can also be found through the following methods.

3. Long to medium-term strategy: Focus on hedging, protection, and low-cost betting.

Based on the logic of significant uncertainty in the medium to long term, hedging can also be considered across different assets or sectors. For example, Technology stocks and Gold may move in opposite directions, going long on the former and short on the latter can create a certain complementarity, and there are many similar hedging symbols.

A likely situation is that when the market is optimistic, funds will flow into Technology stocks chasing growth, while Gold declines due to reduced demand for safety. When uncertainty dominates the market again, funds will flee to Gold, causing Technology stocks to correct.

So if there is a Holding or plan to go long on Technology-related Assets, it is also possible to consider going long on Gold appropriately at this time. However, if directly using a Long Call to go long on Gold, there will again be a risk of Gold declining in the short term, coupled with certain support logic for Gold in the medium to long term, thus it might be worth considering selling puts (Short Put) at this time, establishing a Gold short position while earning premium income, as long as Gold does not fall below the strike price, it will still yield a profit.

However, as a strategy for hedging, it is necessary to consider which is the main strategy and which serves as an auxiliary strategy for hedging, in order to arrange the proportion of holdings.

In the medium to long term, it is also necessary to guard against policy fluctuations and economic risks. In this case, seeing a bullish short term with medium to long-term uncertainty, some people might consider adopting a Long Collar strategy.

The advantage is that there is protection against downside, and no miss on upside, and since options have both a buy and sell, the overall cost is lower. However, the downside is that if the asset rises significantly, some profit space may be missed.

Finally, there is also a strategy related to time disparity. After volatility settles down, in the medium to long term, the restructuring of the supply chain in Mexico's manufacturing and Southeast Asia may be initiated. Therefore, it may be worth considering selling short-term calls (for example, those expiring in one month) and buying long-term calls (such as those expiring in three or four months) to construct a calendar spread.

Selling short-term calls is to take advantage of increased IV to earn premium income, while buying long-term calls not only serves as a hedge against selling short-term calls but also allows for betting on future trends after the short-term calls expire, with the strike prices of the two options being able to be the same.

This concludes the discussion on this event and the corresponding options strategy. Lastly, I want to say one thing: the market is always changing. If you can learn to use tools to protect yourself, you can make money from volatility!

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