The Upheld Scenario: A Deployment Framework

Executive Summary

We've already discussed a plan for the strike-down scenario. This newsletter addresses the contrarian question: what if markets get the surprise outcome?

The Supreme Court will rule on IEEPA tariff authority between January 13-21. Prediction markets assign 72-77% probability to strike-down, leaving upheld scenarios at 23-28%. This newsletter addresses the contrarian question: what if markets get the surprise outcome?

Three independent analyses converged on the same core insight: the opportunity in an upheld ruling is not in buying "winners"—it is in buying the indiscriminate washout. Steel will gap up on the headline, but Section 232 tariffs already provide 50% protection; an upheld IEEPA ruling adds nothing to the fundamental case, and entries will be chased at poor levels. Defense stocks have no demonstrable correlation to tariff announcements despite the intuitive appeal of tariff-funded budgets. The edge, such as it exists, lies in liquid vehicles that get sold programmatically regardless of underlying fundamentals—and in the 72-hour window between headline shock and workaround clarity, where algorithmic panic meets human patience.

After rigorous red-teaming, most "tariff plays" fail scrutiny. Two trades survive stress-testing. Everything else is entertainment.

Part I: What "Upheld" Actually Means

Markets discuss this ruling as binary, but the opinion space contains at least six distinct variants with meaningfully different market implications:

The upheld scenarios cluster in the 23-28% range—consistent with prediction markets but representing a non-trivial probability that warrants contingency planning. Even within "upheld," market impact varies by 200+ basis points depending on the Court's reasoning and the constraints it places on executive authority going forward.

The key mechanism driving retail exposure is the refund catalyst. An upheld ruling eliminates $133-150 billion in potential duty refunds currently embedded in forward earnings expectations. Over 1,000 companies have filed lawsuits seeking recovery of duties paid under IEEPA authority. On uphold, those claims die. This represents real money coming out of margin expectations for import-heavy retailers—and explains why XRT (the SPDR S&P Retail ETF, tracking companies like Target, Costco, and Best Buy) is the primary vehicle for expressing the downside trade.

A critical distinction: this ruling affects IEEPA tariffs specifically. Section 232 tariffs on steel (50%), aluminum (50%), and autos (25%) are legally separate and survive regardless of outcome. So do existing Section 301 tariffs on China. An upheld ruling validates approximately $140 billion in annual IEEPA duties, not the entire $350+ billion tariff structure. The implication is that steel producers are not asymmetric beneficiaries of an upheld ruling—they already have protection, and this ruling does not add to it.

Treasury Secretary Bessent has telegraphed contingency plans for a strike-down scenario, articulating workarounds via Section 122, 232, and 301 authority. In an upheld scenario, no workaround is needed—the current regime persists. However, a ruling at 10:00 AM Tuesday cannot produce same-day policy clarity regardless of outcome. Legal review, Federal Register publication where required, and USTR coordination take 48-72 hours minimum. The market will trade headline shock before parsing the opinion text, and that temporal gap between reaction and understanding is where the deployment opportunity exists.

Part II: The Selloff Mechanics

XRT has rallied 5% year-to-date to 52-week highs on strike-down expectations, currently trading around $90. The put/call open interest ratio of 3.35 signals hedging demand on long positions rather than speculative shorts—meaning the positioning is vulnerable to unwind if the thesis breaks.

Dealer gamma positioning creates the mechanical basis for the trade. Options flow data shows concentrated short gamma at the $85 strike, where 12,500 call contracts sit against 6,700 puts. When dealers are short gamma, they must sell stock as price falls to maintain delta neutrality—a mechanical, not discretionary, response that accelerates moves through key levels. The $85 strike represents the point where this hedging flow intensifies.

The projected sequence on an upheld ruling:

Between 10:00 and 10:15 AM, the headline hits. XRT gaps down 3-4% on the initial shock, trading through $87 toward $86. This is pure information absorption, just positioning unwind.

Between 10:15 and 11:30 AM, the gamma inflection is breached. As XRT trades through $85, dealer hedging accelerates the move. We estimate approximately $1.2 billion in programmatic selling flows through this window as short gamma positions are managed.

Between 11:30 AM and market close, event-driven pods unwind long calls. Mutual funds with average 1.5% XRT weight treat this as thesis-break. Capitulation volume runs 4-5x normal daily turnover. The projected close is $82-84, representing a 7-9% decline from pre-ruling levels.

Wednesday through Thursday, legal analysis circulates. A narrow statutory affirmation may generate a technical bounce as the opinion is parsed and workaround timelines clarified. Conversely, earnings pre-announcements from import-heavy retailers (Dollar General reports Thursday pre-market) could produce a second leg down if margin warnings materialize.

The 72-hour window between headline shock and workaround clarity is the wedge this framework attempts to exploit.

Part III: The Trades That Survive

After stress-testing, two trades offer genuine edge with defined risk. A third position (CHRW) was initially included as a "complexity hedge" on the theory that customs brokers benefit from administrative chaos regardless of ruling direction. On examination, this thesis fails: C.H. Robinson derives only 15% of revenue from customs brokerage, with the remaining 85% dominated by surface transportation and freight forwarding—segments that are positively correlated to retail health, not negatively correlated. If tariffs crush consumer spending, trucking volumes collapse, overwhelming any brokerage gains. CHRW, it turns out, is not a hedge but a low-conviction spec wearing a hedge costume. It has been removed from the framework.

Trade 1: XRT Washout

The entry level of $84 is not a specific choice (though this could shift as markets move towards decision day - this is current as of the writing of this piece). Three independent technical factors converge within a $0.50 range: the dealer gamma inflection occurs at the $85 strike minus typical slippage; Q3 2025 support established a floor at $84.20 during the August correction; and the 200-day moving average currently sits at $84.18. When multiple unrelated factors—options mechanics, historical support, and trend structure—point to the same level, the probability of that level providing a tradable reaction increases.

The tiered exit structure acknowledges uncertainty about bounce magnitude. A narrow statutory affirmation may produce only a technical retracement to $88-89 as the market prices in workaround timelines. A remand or "Congressional invite" outcome could generate a fuller recovery toward $90 as uncertainty resolves. The two-tier system allows scaling out at the higher-probability target while maintaining exposure to the more optimistic scenario.

Expected value calculation: assuming a 45% probability of fill-and-hold to target versus 55% probability of stop-out, the math is $(0.45 \times 4.50) - (0.55 \times 4.20) = +0.71$ per share. This is a positive expected value setup, though the edge is modest. The framework is not a lotto ticket or home run—it is designed to capture measurable premium while surviving the tail scenario.

Trade 2: TGB Tactical (Conditional on Copper)

Taseko Mines operates the Florence Copper project in Arizona, scheduled to commence production in late January or early February 2026. Florence represents the first new domestic copper supply in fifteen years, using in-situ recovery with an 85-year potential mine life. Wellfield operations began in October 2025, and the production announcement is expected between January 30 and February 5.

The entry level of $2.10 sits 5% above the August 2025 capitulation low of $2.00, providing a buffer against commodity-driven volatility. This buffer matters because TGB trades at 0.82 beta to copper futures—if copper breaks below $4.00/lb on a global growth scare triggered by tariff uncertainty or China retaliation concerns, the commodity headwind overwhelms any tariff tailwind regardless of ruling outcome. During the August 2025 correction, copper fell from $4.30 to $3.90 (9% decline) while TGB fell from $2.60 to $2.05 (21% decline). Commodity risk dominates idiosyncratic catalysts in this name.

The condition is binding. If copper futures trade below $4.00 at the time of ruling, no entry is taken regardless of TGB price action. The thesis depends on tariff-driven reshoring premium layering onto an existing production catalyst; if the commodity is in distress, that premium cannot materialize.

Part IV: Execution Framework

The problem with manual execution on binary events is that retail platforms have historically failed at precisely the moments they are most needed. Schwab's order queue lagged 8-12 minutes during the March 2020 selloff. TD Ameritrade's mobile application failed for 47 minutes on August 5, 2025. If your professional obligations require you to be in meetings at 10:00 AM Eastern, manual execution is unreliable.

The correct framework is pre-set conditional orders entered Monday evening, with discipline to let them execute—or not execute—without intervention.

Pre-Ruling Setup (Monday January 12, Evening)

The time condition on XRT matters. A print of $84 before 10:30 AM likely represents a flash spike in the initial chaos rather than the capitulation low. By requiring the condition to trigger after 10:30, the framework filters for exhaustion rather than catching a falling knife.

If Orders Fill

Immediately enter OCO (one-cancels-other) brackets for exits:

Then step away. Check positions at 13:00 and 16:00 only. Do not adjust stops based on intraday price action. Do not attempt to trade around the position. The edge is in the entry level and the pre-defined risk management, not in real-time judgment during a volatile session.

If Orders Do Not Fill by Wednesday 16:00

Cancel everything. The selloff was either smaller than projected (XRT held above $84) or the bounce came faster than expected (the market recovered before your limit was reached). Both outcomes indicate the edge has evaporated. Do not chase the trade on Thursday based on the thesis that "it should have worked." The framework specifies a 72-hour deployment window because that is the temporal structure where informational asymmetry exists. After that window closes, you are trading macro, not event.

Part V: Position Sizing

The framework assumes a $100,000 total portfolio with capital specifically allocated for event-driven deployment. The sizing targets a maximum portfolio drawdown of less than 75 basis points if all positions hit their stops—a threshold that allows meaningful participation while preserving capital for subsequent opportunities.

This leaves 88% of capital in cash or existing core holdings, satisfying the principle that event-driven positioning should not jeopardize portfolio stability. The 74 bps maximum loss is the cost of being wrong—an expense that should be acceptable to any investor who has sized appropriately for their risk tolerance.

Part VI: What This Framework Does Not Include

Steel: Section 232 already provides 50% protection on steel imports. An upheld IEEPA ruling does not add to this protection—it merely confirms a separate legal authority. Steel will gap up on the headline as traders conflate the two regimes, but the fundamental case does not improve. You would be buying into crowded positioning at headline highs with no incremental catalyst.

Defense contractors: Initial analysis suggested defense services (V2X, Ducommun) might benefit from tariff revenue flowing to military budgets. On examination, this correlation does not exist in the 2025 data. Defense appropriations are zero-sum and fungible; tariff revenue does not guarantee defense allocation. These are quality compounders that win on contract awards and backlog execution, not budget top-line. They are worth owning on their own fundamentals, but deploying new capital expecting tariff-driven alpha is category error.

Thursday secondary dip: If XRT does not reach $84 on Tuesday and bounces from $86, the market is communicating that the selloff was contained. Do not chase Thursday on the theory that earnings warnings will produce a second leg down. The edge was in the 72-hour window between headline and clarity. After that window, you are competing with institutional desks that have better information, faster execution, and larger balance sheets. Accept that the setup did not materialize and preserve capital for the next catalyst.

Part VII: Scenario Matrix

The probability distribution clusters around $0 outcome. Strike-down scenarios (70-77% probability) result in no fills and no P&L impact—your conditional orders expire unfilled, and you remain in cash. Upheld scenarios (23-28% probability) produce fills with positive expected value. The worst-case scenario—both positions filled and stopped out—costs 74 basis points.

This is a risk management framework, not an alpha engine. The edge is small, positive, and defined. The value lies in the asymmetry of the setup: exposure to a surprise outcome that most market participants have not positioned for, with downside limited to acceptable levels.

Conclusion

An upheld ruling is the surprise outcome, but at 23-28% probability, it is not a tail event. It is the second branch of a decision tree that warrants preparation rather than panic.

The framework above reflects what survives stress-testing. Most intuitive tariff plays—steel beneficiaries, defense budget winners, customs complexity hedges—fail scrutiny when examined against actual data and correlation structures. What remains is simpler and less exciting: a retail ETF that will be sold mechanically if the gamma inflection is breached, and a domestic copper producer with a near-term production catalyst that gains strategic premium under sustained tariff regime.

The edge is modest, the position sizing is conservative, and the exits are pre-defined. This is how event-driven frameworks should work: structured expressions of contingent opportunities with defined risk.

If the ruling upholds IEEPA authority and your $84 limit catches the gamma-driven flush, you deploy 12% of capital into a setup with positive expected value and ride the 72-hour window until clarity emerges.

The framework does not require the upheld scenario to happen, it requires only that you have a plan if it does.

Disclosures: This newsletter is for informational purposes only and does not constitute investment advice. The author may hold positions in securities mentioned. All investments involve risk, including possible loss of principal. Options and leveraged products carry additional risks. Past performance does not guarantee future results.