Jamie Chisholm
6 min read
In This Article:
Early action on Monday shows Wall Street starting the week on the back foot, as trade-war concerns once again dominate the narrative.
This may come as no surprise to Charlie McElligott, strategist at Nomura.
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Known for his colorful stream-of-consciousness notes examining derivatives, McElligott taps the ever-expanding lexicon of Trump trades to tout the “Trump collar” as a way to explain the latest market moves.
A collar, in option markets, is a strategy used to protect against significant losses, but which also limits potential profits. Collars tend to be used when a trader is generally optimistic about an asset owned for the long term, but there’s concern about short-term volatility in the market.
The trade is struck by buying an out-of-the money put option (the right to sell a security at a particular strike price within a given time period) and selling an out-of-the-money call option (the right to buy a security at a particular strike price within the same time period). “Out of the money” refers to when a call-option strike price is above the current asset price and when a put-option strike price is below the asset price.
McElligott argues that investors should think in terms of a collar when they consider a market that is kept in a range by U.S. President Donald Trump’s tariff rhetoric — a market that seems to want to trundle higher, but which is regularly knocked back by Truth Social posts.
“You all know ‘Art of the Deal’ Trump … and over the past month+, the ‘TACO’-kind … but what it all adds up to now is the de facto ‘Trump Collar,’ as the market retrains the reaction function in the ‘Human VVIX’ era,” says McElligott in an email missive sent Friday.
Readers will by now be familiar with the TACO trade. The VVIX is a gauge that measures the volatility of the Cboe volatility index “VIX” VIX, and McElligott is clearly laying the cause of market vacillations at the feet of Trump.
He presents the table below to illustrate just how much Trump — the “Status Quo Disruptor in Chief,” as he calls the Republican president — has been impacting markets.
McElligott says that, late last week, when the S&P 500 SPX sat only a few percentage points shy of February’s record high, the stock market was in the upper band of its range trade because investors have come to terms with what the analyst calls Trump-collar “reflexivity.”
