Tariffs, Wars, and Volatility
Contributed Opinion

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USD index futures are down 0.45% to 108.390, with the 10-year yield up 0.99% to 4.588% and the 30-year up 1.13% to 4.825%.

Gold (-0.26%), silver (-0.42%), and oil (-2.50%) are all dow,n while copper (+0.29%) is up.

Stock futures are mixed, with the DJIA (-0.13%) down 58.8 points, the S&P 500 (+0.08%) up 4.6 points, and the NASDAQ (+0.22%) up 46.25 points. Risk barometer Bitcoin is up 4.99% to $99,474.

Tariffs, Wars, and Volatility

Yesterday morning, I included a paragraph warning holders of volatility positions that if a last-minute deal was pulled off to postpone or cancel the tariffs, stocks could and would scream higher, taking the VIX:US and the UXIX:US sharply lower.

Sure enough, a couple of hours after the opening, with stocks careening lower, Mexico announced that they would be placing 10,000 troops on the border, ensuring tighter border controls and tougher crackdowns on the shipments of fentanyl.

That prompted President Trump to delay the Mexican tariff by one month, after which the markets all turned on a dime and recovered most of their losses.

For those of us holding the VIX March $15 calls, they opened at $4.25, traded up to $4.55, but then faded (as they always do) back to $3.10 as hedgers lifted their portfolio insurance by selling volatility to offset portfolio losses. Similarly, the UVIX:US opened at $34.41, traded up to $35.78, then collapsed to $29.31 as volatility was dumped.

Further near-term risk for holders of the volatility trade was that the discussions between the U.S. and Canada would also turn out successfully and that lasting concessions on border security, immigration, and fentanyl would eliminate the need for tariffs. That did happen, reducing concerns that the bond markets would allow yields to rise, causing additional pressure on stocks.

Also weighing on the volatility trade near-term was that by mid-February, the corporate buyback window will be fully engaged, and that will keep stocks fairly well bid despite the month of February being one of the weakest seasonally for the calendar year.

Needless to say, I was forced to scrap the email alert twice as the absurdity of the news flow made it impossible to trade. As it stands, I remain long the 40 calls VIX March $15 from $3.35 that are trading at $3.60 in the pre-opening.