On Thursday, President Trump announced a 90-day extension for a trade deal deadline with Mexico. He shared this news on social media just hours before the original deadline of August 1. Without this extension, Mexico would have faced a 30% tariff. Trump noted that negotiating with Mexico is more complex than with other countries. This 90-day extension gives a temporary break, easing the immediate threat of tariffs that the market was concerned about. We anticipate a drop in short-term implied volatility for assets related to U.S.-Mexico trade, especially the Mexican Peso (MXN). Traders holding protective options may want to sell them now to benefit from the falling prices. The peso, which weakened to around 21.50 against the dollar in late July, has already bounced back to about 20.80 following this news. The iShares MSCI Mexico ETF (EWW), a leading tracker of Mexican stocks, rose over 2% in after-hours trading, indicating positive market sentiment. This comes after the CBOE FX Mexican Peso Volatility Index surged above 18%, a level not seen since early 2024. However, this extension only delays the risk, creating a new uncertainty until the next deadline at the end of October. Now may be a good time to consider buying longer-term options, such as those expiring in November or December, since they are relatively inexpensive. A strangle or straddle strategy on the EWW could be useful as we expect an increase in volatility as the new deadline approaches. We have seen similar trends during the trade disputes of 2018 and 2019 when deadline extensions led to brief drops in volatility before more political tensions arose. These past events showed us that unresolved trade issues cause a cycle of calm followed by turmoil. Each drop in volatility proved to be a buying opportunity for options traders who anticipated a future price swing. We’re also monitoring options on U.S. automotive and manufacturing stocks, which heavily depend on the supply chain in Mexico. The U.S. Bureau of Economic Analysis reports that almost 20% of auto parts come from Mexico, so companies in this sector are very responsive to this news cycle. While calls on these stocks may see a short-term increase, the underlying risk for the fourth quarter remains high.

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