On Thursday, President Trump announced a 90-day extension for a trade deal deadline with Mexico. This decision was shared via a social media post and came just hours before the initial deadline of August 1.
Had the extension not been granted, Mexico would have faced a 30% tariff. Trump explained that the intricacies of negotiating a deal with Mexico differ from those with other countries.
This 90-day extension provides temporary relief, pushing back the immediate threat of tariffs that the market had been bracing for. We expect a drop in short-term implied volatility on assets tied to the U.S.-Mexico trade relationship, particularly the Mexican Peso (MXN). Traders holding protective puts for an August fallout may look to sell them now to capitalize on the falling premium.
The peso, which had weakened toward 21.50 against the dollar in late July, has already rebounded to the 20.80 level on this news. We saw the iShares MSCI Mexico ETF (EWW), a key tracker of Mexican equities, gain over 2% in after-hours trading, signaling immediate bullish sentiment. This follows a period where the CBOE FX Mexican Peso Volatility Index had spiked above 18%, a high not seen since early 2024.
However, this extension only postpones the risk, creating a new period of uncertainty leading to a new deadline around the end of October. This looks like a good time to consider buying longer-dated options, such as those expiring in November or December, while they are relatively cheaper. A strangle or straddle on the EWW could be an effective strategy to play the expected rise in volatility as the new deadline approaches.
We saw a similar pattern play out during the trade disputes of 2018 and 2019, where deadline extensions led to brief dips in volatility before the next political flare-up. Those past events taught us that unresolved trade issues create a predictable cycle of calm followed by turbulence. Each dip in volatility proved to be a buying opportunity for options traders betting on an eventual price swing.
We are also watching options on U.S. automotive and manufacturing stocks, which have significant supply chain exposure to Mexico. With the U.S. Bureau of Economic Analysis reporting that nearly 20% of auto parts are sourced from Mexico, companies in this sector remain sensitive to this news cycle. Calls on these names might see a short-term pop, but the underlying risk for the fourth quarter remains elevated.
