Tariff risks: are we getting complacent?
- The market has breathed a sigh of relief after the latest US-China talks but we’re only just beginning tariff negotiations
- As much as we want periods of calm to stick around, we need to prepare for volatility
- Index options strategies might be able to help hedge against market moves and manage volatility
The value of your investments and the income you receive from them can go up and down, and you may get back less than you invest. Any examples are for illustration purposes only.
Last week, my colleagues and I paused, turned the volume up and watched President Trump and Prime Minister Starmer signal to the world that a tariff truce could be a pretty civil, positive affair. There wasn’t a great deal of detail in their phone call, but that wasn’t the point. The aim was to show the other countries queuing up that talks could be swift, mutually beneficial and maybe less scary than we expected.
That’s what the market took from it anyway. Looking ahead to a tougher conversation with China, the S&P 500 popped, while the FTSE 100 chose not to budge before the details emerged. And, with a blend of US inflation unexpectedly falling to 2.3% in April and US-China talks rolling back tariffs for another 90 days, the US index is now in the green in 2025, having recovered all its Liberation Day-induced losses.
Discrete calendar year performance
| 2020-21 | 2021-22 | 2022-23 | 2023-24 | 2024-25 | |
| S&P 500 | 28.4% | 13.6% | 1.7% | 27.0% | 7.8% |
| FTSE 100 | 22.0% | 10.5% | 8.6% | 12.8% | 6.0% |
As at 13 May 2025. Source: FE FundInfo. Total return basis, in local currency. Past performance is not a reliable guide to future results.
So, business as usual? Not quite.
Recency bias is real, don’t fall victim to it
There’s nothing wrong with being positive - if you had stayed invested in the S&P and gone to sleep coming into April you’d have hardly noticed any portfolio swings and would be wondering what all the fuss was about. The market rebound also gives an idea of how relieved investors are, after all it could have got a lot uglier after 2 April. But, we shouldn’t fall into the trap of thinking the job is done and the tariff narrative is nearing its end.
News this week suggests China is less than pleased with the UK for agreeing to push Chinese products out of its existing supply chains to appease the US. It’s a sign that, while the US lies at the centre of the tariff web, individual deals with Trump will have knock-on effects for other international relationships. As more deals are made, the ripples will likely spread and prompt negotiations for months to come.
Tariff risks: what to look out for
The current political détente and short-term market reprieve hinge on the success of prominent US negotiations, with China clearly the most influential trade partner. If the latest tariff reductions aren’t bolstered with something more concrete by the time they explore in August, we could see volatility return to markets heading into the autumn.
Read more:
Are you tariff proofing your portfolio?
US tariff volatility: what’s your strategy?
US market correction: could index options help?
On the economic front, the Federal Reserve held interest rates steady in May, saying tariffs have risked higher inflation and unemployment amid "so much" uncertainty. The reality is tariffs are inherently inflationary, so all eyes will be on US inflation later in the year. Pre-tariff expectations were for a decline in the second half of 2025 but if it stays high, rates might too.
Companies are already grappling with how much tariff-induced price hikes they can realistically pass onto consumers. If they are forced to take the hit and absorb costs to keep customers on board, profit margins across the board could take a hit. Small and mid-cap firms are particularly vulnerable here, as they lack the pricing power and supply chain flexibility of larger firms. Case in point, last week camping-cum-cooler brand Yeti predicted free cash flow of $100m - $125m versus previous expectations of $200m because of supply chain disruption (i.e. moving operations out of China) and higher tariff costs.
How to invest through US tariffs using index options
Good companies don’t go bad overnight but we do need to keep up with how cross-border developments affect them. Restructuring supply chains takes time and if everyone’s doing it, bottlenecks in other manufacturing hubs like Vietnam and Bangladesh could emerge.
Read more:
Getting started with options
A big, little primer on options
Trading calls and puts
Zooming out, it’s clear that entire markets are flitting between pain and relief on the back of every development in the tariff story. If index options are your thing, here are a few strategies that might come in handy.
Protective put (if you’re hedging)
Buying a put option on an index you already own, like the S&P 500, gives you the right to sell at a set price if the market drops, limiting your losses.
Long put (if you’re bearish)
Buying a put option on an index you think will drop profits if the index falls below the strike price plus the premium paid. It might be useful if you think there is a chance the market will fall in the short term.
Iron condor (if you think a market will mode sideways)
If you think an index will stay within a certain range you might be able to use that to your advantage by selling a call spread and a put spread on an index at the same time. It can be useful if you expect volatility to drop or stay within a band.
Straddle or strangle (if you expect volatility)
If you expect a major bout of volatility but can’t be sure which direction it will take, straddles and strangles are tools that might be able to help. By buying both a call and a put (with the same strike price in the case of a straddle, and different strike prices in a strangle) you could profit if the market moves big in either direction.
There is still a long way to go
The fact that this is only the start of the dealmaking programme gives us an idea of the opportunity for market disruption from here. It may be that you choose to ride it out or try to take advantage of any ensuing volatility - just don’t fall into the trap of thinking any recent blasts of market madness or periods of calm will naturally stick around. As the old saying tells us, this too shall pass.
Important information
When investing, your capital is at risk. The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you invest. Forecasts aren’t a reliable guide to future results or returns.
Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice. This is not an offer, recommendation, inducement or invitation to buy, sell, or hold any securities, or to engage in any investment activity or strategy.
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