FxWirePro: Take a glance at implied volatility dislocation and options perspective on USD/MXN winning streaks

USDMXN has constantly been spiking higher, gained consecutively 7th week in a row, surged about 1.30% this week as well.

Technically, the current price spike well above DMAs with bullish crossovers, both momentum & trend indicators signal more rallies on cards. Bullish engulfing candle is traced out on monthly plotting, that indicates strength in the prevailing uptrend.

Well, the MXN peso sell-off caused a vol surface dislocation, pushing skews to the highest since the 2016 US Presidential elections. 

There exists the opportunity to analyse what generally works on the MXN vol surface, on a back-tested basis and from a pure vol standpoint. The above chart analyses a variety of structures, all for 6M maturities. For instance, selling RRs (delta-hedged) works orders of magnitude better than selling ATM vol (refer above chart - bottom, Sharpe Ratio of 0.87 vs. 0.15 over past 5-yrs). 

Delta hedged 1*1.5 ratio call spreads exploit the dislocation while also having historically offered a superb performance. +1Y/-3M calendars of risk reversals take advantage of the lagging back-end vs front-end implied skews.

Mexico-induced reprisal of risk in Brazil best hedged via long 3M USDBRL straddles subsidized by selling OTM puts.

Currency Strength Index: FxWirePro's hourly EUR spot index is showing -75 (which is bearish), while GBP is flashing at -32 (which is bearish), while articulating at (12:06 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex