Trader bets against Mexican stocks ahead of the US election

The Mexican stock market could be in a precarious position ahead of the U.S. presidential election, and one trader is attempting to take advantage of all the uncertainty.

Todd Gordon of TradingAnalysis.com sees the ETF that tracks Mexican stocks, EWW, in a "technically weak position" ahead of the election.

A "sideways triangle consolidation" has formed on the daily chart of EWW, Gordon said. What Gordon means in this case is that EWW has traded in a range for the past few months. When such a pattern forms, the stock usually repeats its previous trend prior to the consolidation, he said.

In this case, EWW had been falling since early 2015, which leads Gordon to believe that from a technical standpoint, Mexican stocks are headed lower.

"Couple that with oil prices that are struggling around the $50 region and a stock market that I believe is very overbought, all those forces could press EWW lower," Gordon said Monday on CNBC's "Trading Nation."

While Gordon's predictions for EWW hinge on the ETF's technicals, Mexican stocks and the peso fell last week after news of the FBI opening an investigation into Hillary Clinton's emails hit the market, reinforcing what looks to be a trend when it comes to the Mexican stock market and its currency moving with election news. Both have tended to rise when a Clinton win is more certain, and fall when Trump looked to have closed in on Clinton's lead. This is thought to be in reaction to Trump's proposals to sharply curtail international trade.

The Mexican stock market's ties to the election have actually led to a spike in implied volatility that traders can take advantage of, according to Gordon. With the price of options so high, Gordon believes that selling a "call credit spread," which is a neutral or bearish bet that a trader could make if he/she thinks a stock is headed lower, would be a good play. Since Gordon thinks EWW is poised to drop, and implied volatility will likely fall after the election regardless of who wins, he said a call credit spread would allow him to account for both a drop in EWW and cheaper options prices.

Gordon is looking to sell the November 52-strike calls and buy the November 53-strike calls for a total credit of 36 cents per share. If EWW were to stay below $53 and close below when the trade expires on Nov. 18, Gordon's maximum reward would be the $36 from making his bet. If EWW were to rise, however, Gordon could lose $64, meaning that the trade has a skewed reward-to-risk ratio.

But Gordon say the levels on his trade actually mitigate the risk.

"We're selling a call spread that is several dollars above the current price, so we have a high probability of success," he said. "That is what we pick up in exchange for the skewed reward to risk ratio."

EWW is currently up almost 2 percent this year, but it has slid about 2.5 percent since Oct. 24.

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