We're in for Another Wild Weekend of Headlines. Here’s a Trade to Make Ahead of It.

Upon taking office this month, President Donald Trump initiated a sweeping trade review, set to conclude by April 1. However, ahead of that deadline, he announced that new tariffs would take effect on February 1—25% on goods from Mexico and Canada and 10% on imports from China.

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On Thursday evening, Trump reiterated his commitment to imposing these penalties, causing the Canadian dollar and Mexican peso to decline while pushing the S&P 500 lower. However, markets quickly recovered, suggesting that while investors are uneasy about the potential tariffs, many remain skeptical about their full implementation.

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There is still hope that these tariff threats are primarily a negotiating tactic, similar to how the administration recently used leverage to get Colombia to accept U.S. deportation policies.

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According to a team of Evercore strategists led by Julian Emanuel, either outcome—imposing or delaying the tariffs—could surprise the markets. This uncertainty presents a challenge for equities, particularly since the S&P 500 has rebounded from Monday’s DeepSeek-related sell-off and is now trading within 0.8% of its recent record high.

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"Surprises will continue to dominate the market as February 1 approaches," Evercore analysts noted. "With the S&P 500 near all-time highs, we could see a 3-5% move in either direction in the short term, depending on whether the tariffs are enacted. As the typically volatile month of February begins, we remain on track for an eventual climb to 6,800 by year-end."

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A key measure of market volatility, the CBOE VIX index—commonly known as Wall Street’s "fear gauge"—is currently trading around 15, below its long-term average of 19.5. Evercore suggests this indicates that investors may not be fully pricing in the potential for unexpected developments.

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To hedge against market fluctuations, Evercore recommends a long option straddle trade using the SPDR S&P 500 ETF Trust (SPY), a highly liquid investment vehicle that tracks the performance of the S&P 500.

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Options trading allows investors to buy or sell an underlying asset at a predetermined price (strike price) before a set expiration date. A "call option" grants the right to buy, while a "put option" provides the right to sell.

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A straddle trade involves purchasing both a call and a put option on the same asset at the same strike price and expiration date. This strategy is particularly useful when an investor expects market volatility due to an upcoming event but is uncertain about the direction of the move.

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In this case, Evercore’s recommended strategy involves buying both the SPY 615 April calls and SPY 615 April puts. The analysts included a chart in their report illustrating potential outcomes.

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"A long straddle inherently anticipates increased volatility," the strategists explained.

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For this trade to be profitable, SPY would need to move beyond either $645.44 (the call strike price plus the total premium paid) or drop below $584.56 (the put strike price minus the total premium paid). The current SPY level is $605.04.

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With uncertainty surrounding potential tariffs and broader market conditions, Evercore believes this strategy could be an effective way to capitalize on any upcoming market swings.

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