Tariff Turmoil: Investors Load Up on Options and Stocks

As the April 2 deadline for President Donald Trump's "Liberation Day" tariffs approaches, investors are showing a surprising level of calm. The implied-volatility term structure of S&P 500 stock-index options reflects a relatively low level of concern, suggesting that traders are not overly worried about the potential impact of the tariffs. This sentiment is further supported by the Cboe Volatility Index (VIX), which climbed only 0.6% to just under 18, still below the 20 threshold typically seen as a sign of relatively low volatility.



One of the key factors driving this bullish sentiment is the multibillion-dollar trade adopted by what’s been dubbed the "JPMorgan options whale." Kevin Muir, a former institutional trader, suggests that dealers taking the other side of the trade will need to buy the market into the quarter-end to manage their exposure, underpinning the S&P 500 in the process. This dynamic is expected to create a bullish environment as dealers hedge their positions, potentially driving up stock prices.

Retail investors have also been actively buying the dip, pouring over $32.9 billion into U.S. stocks since the S&P 500 hit its all-time high on Feb. 19. This retail buying ranks in the 97th percentile for any 24-trading day stretch since 2014, indicating a high level of confidence and optimism among individual investors. Furthermore, there has been a significant jump in investors buying options, particularly out-of-the-money call options, which reflect a bet that the share price will go up in the near future. This trend suggests that investors are taking a more tactical approach ahead of the April 2 tariff announcement, using options to gain exposure while also hedging their positions.

The bullish sentiment is also supported by the fact that investors are not just buying stocks but also buying options, with a notable uptick in options activity on Monday. This trend is contrary to weaker buying of cash equities, indicating that investors are using options to take some chips off the table or to gain exposure while hedging their positions. The options buying trend is similar to what was observed in August 2024, after the stock market fell quickly in the first half of the month, suggesting that investors are starting to expect the market to rebound.



While the overall market sentiment appears bullish, it is important to note that the situation remains fluid. Trump administration officials have been trying to tamp down expectations that every pledged tariff action will go into effect on April 2. Instead, a significantly reduced batch of tariffs will be announced next week, and more could follow later. This more targeted approach represents a significant pullback from some of the harshest tariffs Trump had promised.

However, Trump signaled that if tariffs on various products are delayed, they won’t be delayed for very long. He suggested that tariffs on cars could come first, saying there’d be an announcement “very shortly.” This uncertainty adds to the market's volatility, but the overall sentiment remains cautiously optimistic.

In conclusion, as Trump's tariff "Liberation Day" nears, investors are loading up on options and stocks, driven by a combination of strategic trades, retail buying, and a more targeted approach to tariffs. While there is some nervousness, the market appears to be holding up well, with investors taking a tactical approach to navigate the uncertainty.