Well, that was lovely

Look at any US index over the last few days, and it’s not looking good. It’s no secret that equities lost about 10% of their value, with steeper losses elsewhere.

This post is not political, and at the risk of tying politics and economics too closely together for our purposes as traders, let’s talk about my approach to investing during the trade war.

The ugly start

Most of my investments are in US equities, with more Nasdaq than S&P. This is offset by some dividend ETFs.

No matter how I slice it, I’m down a good $200k since the top in Feb. That’s approximately in line with the market’s decline, since most of my money is in indexed ETFs.

Where it gets ugly is on my options trading. I’m a huge proponent of short strangles during volatility. But when the market drops 15% in a month, strangle sellers are going to lose some money.

The loss on the current short strangle position was about $11,000 when I closed. After subtracting the gains from the short calls along the way, the loss is about $7,000. This wipes out all the short strangle gains for probably the last 6-8 months, but I don’t have the inclination to dig up the actual figure.

On the one hand, this shows how badly one naked trade can go. On the other, I probably saved myself about $6,000 more dollars of potential loss by sticking to the textbook rule of “close when you’re at 200% loss of premium collected.”

If I had held my strangle longer, like I used to, then I’d be much deeper in the hole.

The hope spot

All that said, short strangles were, for a while, a boon to my portfolio.

Despite the recent losses, I’m still outperforming the S&P for the last 12 months.

The space between Apr 2024 and Jan 2025 is where I used short strangles heavily, and the gap between my performance and the S&P continued to widen. The short strangle gains were slowly adding value.

Since Jan, the spread has tightened again since the strangles ended up being a liability. I’m now about in-line with the S&P.

The way ahead

Market volatility is through the roof. The trade war has caused the fear gauge to spike to levels not seen since Covid, and before that, the dot com burst.

Historically, buying with VIX this high is a winning move. But I am not ready to back up the truck.

The market’s decline will depend entirely on how long the trade war lasts. If we sustain massive tariffs across every country in the world, we will face a deep recession. I don’t think even the president wants that.

However, until the trade war boils over, we will likely continue to decline. I could see us entering a prolonged bear market. Buying dips is fine, but you don’t want to load up too long before the bottom- your entry has to be prudent.

Three theses

When should you buy the dip? That depends on your thesis about how the trade war will play out.

1) The tariffs last a long time: in this scenario, I expect a long bear market. Hold long puts and find something other than equities to invest in. No matter your long-term thesis on the effects of tariffs, the fear of structural change alone will cause much steeper decline.

2) The trade war will be fleeting as new deals emerge: this is the more popular, and potentially over-optimistic view. The reason the market hasn’t tanked further is because people recognize that Donald Trump’s policies can change very quickly, and it’s plausible that the entire tariff war could end on Monday (at least to the extent that the US significantly decreases tariffs, which other countries respond positively to).

In this scenario, buying equities now is reasonable. If countries respond very quickly to the tariffs by negotiating new deals, even with no meaningful change from pre-existing deals, the market decline will likely slow significantly and then begin reversing.

Traders who believe this should start buying into equities now, especially broad market ETFs, with potential concentration in the industrials and utilities sectors.

3) The US declares victory in the trade war, but other countries do not concede: this is a pessimistic outlook, but one that I subscribe to. I expect that Donald Trump will withdraw tariffs and declare victory in the trade war, even if no meaningful renegotiation took place.

As evidence, I’d point to Vietnam, which has few tariffs on the US, “bending the knee” to the US.

This is being presented as a huge victory for the US, which will allow the president to reduce tariffs and declare victory.

Initially, I believe this will lead to a market rally. However, I expect that the EU and China will not rescind their own tariffs, and the trade war will proceed.

China, being authoritarian, will be able to weather the storm better than the US can, even if China takes more damage in the trade war. The EU, being very bitter, will seek closer trade ties with China instead of the US.

The sustained trade war with China specifically will lead to further declines. This is my pessimistic thesis.

My approach

I am not good at predicting the future, and I can see this situation evolving in multiple ways. To hedge my bets, I plan on trading cash-secured puts with OTM options until I am convinced there is a meaningful sentiment change.

SPY $464 was the top of the 2021 bubble. I expect algorithmic buying in this area, and it’s another 9% decline from our current level.

I intend to sell OTM short puts in this range, since I have been saving cash for several months. Other ETFs, like SPLG of SFY, are reasonable alternatives, but with less volume and fewer expiration dates. The idea is to have any indexed ETF with options on it.

With VIX at 45, even 5-DTE options offer 1% weekly returns at this level.

Considerations

Reflect on how you think a trade war will play out. Are you as bearish as me? Trade according to your views. But overall, I’d avoid going all in at SPY $505.