Arguably the best gauge for the outcome of the US election has been the Mexican Peso, trading in lockstep with Trump’s polling results. For investors that don’t trade forex, the iShares MSCI Mexico Capped ETF (EWW), which tracks the MSCI Mexico IMI 25/50 Index, works just as well.
EWW is currently at the 99th percentile of it’s Implied volatility rank, meaning investors expectations are building toward a sudden move in the ETF. Subsequently, option premiums are very rich. A straddle expiring the week of the election is priced at ~$4 per contract, meaning EWW would need to trade to $45 or $53 for the trade to begin to become profitable, a significant post-election move. But even given this high premium, the favorable trade is with the option buyer in this case.
The general election battle lines became visible in early summer when it was clear Trump would be the Republican nominee. Since then the market, while acknowledging the current pre-election jitters, has been relatively flat. Meaning that during this time, EWW has traded between roughly $46 and $54. It’s reasonable to assume that these Highs/Lows will be broken and EWW will either rise to ~$54.5 or would decline sub $45.
- Buy $49 strike Call/Put for November 18, ~$450 per contract (Gives an extra week for position to play out vs. Nov. 11th)
- Exit at 25-50% Profit or no later than early next week ~ Monday the 14th.
- Strangle provides a much higher degree of leverage and lower per contract cost, which I believe is a better way to play long volatility on EWW
- ~$200 per contract Put @ $46, Call @$52 (~ 25 delta ).
- Exit at 50-100% Profit or no later than early next week ~ Monday the 14th.
Post-election Bull/Bear Credit Spreads
There is a significant amount of uncertainty around election outcomes, and as EWW is used as a key proxy for the outcome, the markets could push EWW significantly higher or lower than fundamental intrinsic value. While Implied Volatility will likely drop on Wednesday post elections, it will likely remain elevated and an opportunity will exist to write options.
- Sell 25 Delta Credit Spreads 1-5 Days after results for December, as markets push EWW to unsustainable levels