Tariffs Cause Recession! How to play short volatility?

On the eve of "April 2", Goldman Sachs sounded the recession alarm.

According to Dow Jones News Agency, in the latest report,Goldman Sachs has significantly increased the probability of the U.S. economy falling into recession in the next 12 months from the previous 20% to 35%, almost doubling.

This pessimistic expectation mainly stems from the "reciprocal tariff" policy to be announced by the Trump administration on April 2nd.Goldman Sachs expects the policy to impose an average reciprocal tariff of 15% on all U.S. trading partners, resulting in a 15 percentage point increase in the average U.S. tariff rate, up from the previous forecast of 10 percentage points.

Goldman Sachs warned in:

"Our upward revision of recession probability reflects our lower economic benchmark expectations, a sharp deterioration in household and business confidence, and rhetoric from White House officials that they are more willing to tolerate short-term economic weakness in order to achieve their policy goals."

In the report, Goldman Sachs also raised its inflation forecast and lowered its GDP growth forecast, raising its core PCE price index forecast by the end of 2025 by 0.5 percentage points to 3.5%, and lowering its GDP growth forecast by 0.5 percentage points to only 1.0% (on a quarterly year-on-year basis), the unemployment rate is expected to climb to 4.5%.

Goldman Sachs: The Fed will cut interest rates three times this year, and the risk of a hard landing for the economy rises

As the economic outlook deteriorates, Goldman also expects,The Fed will cut interest rates three times in a row in 2025-in July, September, and November, ultimately keeping the Federal Funds rate forecast at 3.50-3.75%.

Previously, Goldman Sachs expected that the Federal Reserve would not cut interest rates again this year, and there would only be one interest rate cut in 2026. Goldman says:

"While the Fed has so far downplayed the impact of rising inflation expectations, we believe it does raise the threshold for rate cuts, especially with greater emphasis on a potential rise in unemployment as a justification for rate cuts."

Worryingly, Goldman Sachs also expects weakening U.S. economic fundamentals and increased consumer vulnerability,Real revenue growth is expected to be only 1.4% in 2025, significantly lower than the level of recent years.

Goldman Sachs warned:

"Although sentiment has been a poor predictor of activity over the past few years, we take the recent decline in sentiment less lightly because economic fundamentals are not as strong as they were in previous years."

The analysis pointed out that this indicates that the U.S. economy may be entering a more fragile stage, and market sentiment and policy risks may have a greater drag on the economy than in recent years.

How to short volatility?

In options, short$S&P 500 Volatility Index (VIX) $The strategy is mainly to earn time value by selling options, because when volatility decreases, the time value of options will shrink. Here are a few commonly used strategies for shorting volatility:

1. Sell Straddle or Strangle Strategy

   1. Sell straddle: Sell call and put options with the same strike price at the same time, usually used when the underlying price is expected to be stable or not fluctuate much.

   2. Sell Wide Straddle: Sell call and put options with different strike prices, which is suitable for situations where the volatility is expected to be low, but the specific price direction is uncertain.

   3. Note: Both straddle and wide straddle strategies are naked selling strategies with high risks, and a rebound in volatility or drastic price changes will lead to huge losses.

2. Iron Condor

   1. Sell the call and put options on either side of the underlying asset price, and then buy the call and put options farther away at the strike price as protection.

   2. It is suitable for situations where volatility is expected to be low or price changes are limited, because this strategy is prone to losses in highly volatile markets.

3. Iron Butterfly Spread

   1. Similar to an iron eagle, but similar to a straddle, select the central strike price to sell the call and put options, and then buy the call and put options on the strike prices farther away on both sides.

   2. The gains of this strategy also come from low volatility, but the profit margin and risk are more limited than naked selling straddle.

4. Calendar Spread

   1. Short-selling volatility is achieved by selling near-term options and buying forward options (with the same strike price).

   2. If volatility falls back, recent options will depreciate rapidly, while forward option prices will remain relatively stable, which is conducive to profit-making.

5. Sell a single-leg call (Short Call) or sell a single-leg put (Short Put)

   1. When the underlying asset is expected to fluctuate little or not rise or fall, selling call or put options can earn the loss of the time value of the option.

   2. This single-leg strategy is risky and is usually suitable for situations where you have strong confidence in the trend of the underlying.

6. Ratio Spread

   1. Selling multiple options contracts and buying a small number of options contracts of the same type is often used in situations where volatility is expected to decrease, especially to increase the sell position based on the spread strategy.

   2. When volatility decreases, an increase in the number of options sold helps to increase returns, but the risk is also relatively increased.

Each of these strategies has its advantages and disadvantages, and is usually suitable for market environments with clear expectations for changes in volatility. Generally speaking, short volatility strategies require special attention to risk management, because once volatility rises or market fluctuates unexpectedly, it will face greater losses.