Wednesday, June 23rd, 2021

How Should You Trade Options as the Trade War Worsens?


Calls and puts are the weapons of choice for the option trader. Considering that the US China trade war is likely to worsen and likely to endure, how should you trade options as the trade war worsens? A lot of this will play out with a political spin on both sides which will momentarily drive stocks up or down. Short term calls or puts may see be useful in such cases. But, how will this play out in the longer term and which stocks will most strongly affected? An obvious case in point is Boeing. These folks are selling billions of dollars-worth of airplanes to China. And, China is very likely going to slap prohibitive tariffs on Boeing jets or simply direct their airlines to buy only from Airbus.

Boeing and the Trade War

In the last year Boeing has had four significant down and up cycles as global events and the threat of a trade war have played out. An options trader who correctly anticipated each, or any, of these swings in stock price could have purchased puts first of all and then calls for double profits in each price swing. An option trade who was uncertain of market direction during the year, or right now, would still recognize the market volatility and could use a long straddle approach. He or she could profit from price movement in either direction.

A real problem for Boeing, and the rest of the world, is that the trade war could be very prolonged or even permanent, changing trade relationships for years and years. Our sister site,, asked a good question. Can China make the changes necessary to end the trade war?

The basic problem for China is that the people who run the Communist Party plan to stay in power. Each time there is a fork in the road leading to greater economic, social and political freedom versus the status quo the Party sees freedom as a threat to Party authority and the status quo wins, no matter the cost. The trouble is that China has become very successful and has over-leveraged itself due to its ambitions. The country has a massive and growing debt and many wealthy Chinese finding ways to take money out of the country. China’s money is now “voting with its feet” so there is trouble in the land of managed capitalism.

How Do You Apply Your Calls and Puts to This Situation?

While many of the trading opportunities will be short term and short term options contract will be sufficient, many of the changes in markets will play out over time frames longer than the duration of a normal option contract. As such, LEAPS options may be a better choice. These long term equity anticipation securities typically have two year durations and all of them expire in January. This longer timeframe may be useful as the give and take of the China USA trade war works out. The sad fact is that neither the USA nor China wants the other to gain, China because it wants to advance and the USA because it wants to retain its position. This will be a long fight and option traders can profit by correctly anticipating market movements.

How Should You Trade Options as the Trade War Worsens? PPT

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