In a surprising turn of events, the recent China-US trade discussions held in Geneva have delivered more constructive outcomes than most market participants had anticipated. The tone of the talks was markedly positive, injecting a renewed sense of optimism into global markets and triggering a noticeable ripple effect across equity volatility spreads. Specifically, we’ve observed a normalization in the volatility spread between the S&P 500 and key European indices such as the DAX and the Euro Stoxx 50 (SX5E).

This shift in sentiment is not just symbolic—it’s quantifiable and tradable.

Market Implications: A Rebalancing of Volatility Premiums

One of the more immediate market responses to the trade breakthrough has been the compression of implied volatility in the US relative to Europe. Prior to the talks, geopolitical uncertainty and inflation stickiness had kept volatility premiums elevated in the US, especially when compared to European counterparts. Now, with a more stable macro backdrop emerging, this spread is reverting closer to historical norms.

From a derivatives standpoint, this rebalancing opens up compelling opportunities for strategic positioning.

The Trade: Leveraging US Momentum Through Options

We see an attractive short-term trade setup by expressing bullish exposure to US equities via S&P 500 (SPX) short-dated call options, while simultaneously selling calls on either the DAX or SX5E to fully fund the position.

This structure offers several advantages:

• Cost neutrality: By selling European index calls, the premium received can fully offset the cost of SPX call options, making the US upside exposure essentially free in terms of upfront cost.
• Relative value play: US equities continue to lag their European counterparts in terms of performance year-to-date. This creates room for catch-up rallies, especially as macro conditions stabilize and earnings momentum builds in the US.
• Volatility asymmetry: With volatility premiums resetting, US options now offer better value relative to the potential upside, while European options remain relatively rich—making them ideal candidates for funding legs.

Why the US Still Holds the Edge

Despite bouts of softness, the US equity market remains structurally stronger. Earnings revisions are more positive, macro data has shown resilience, and mega-cap tech continues to act as a performance engine. Meanwhile, Europe faces a less dynamic growth trajectory, with cyclical sectors exposed to external shocks and a more constrained monetary policy toolkit.

The technical setup also favors further US strength. Momentum indicators on the S&P 500 have firmed, and the index is pushing through resistance levels with renewed vigor. In contrast, European indices appear to be topping out or consolidating after a strong early-year run.

A Timely Expression of Divergence

In the aftermath of the Geneva trade developments, we believe this options strategy is a timely and efficient way to play the next leg of relative performance divergence. By positioning for continued US equity strength through SPX calls—while offsetting cost via European index call sales—investors can express a high-conviction macro view with limited downside risk and no net premium outlay.

This isn’t just about a tactical trade—it’s a calculated bet on the shifting global narrative, one where the US regains its leadership mantle in equity performance.