Mexico has been a focus of debate in the current presidential election cycle, and one trader is betting on a breakout for the country's stock market based on recent events.
The ETF tracking Mexican stocks, EWW, has struggled to maintain any rally this year, sitting at less than 1 percent below its levels at the start of 2016. But following the first presidential debate, Dan Nathan of RiskReversal.com believes one trader is using the ETF to bet on a slip in the polls for Republican candidate Donald Trump.
The Mexican peso and Mexican stocks have moved with this current election cycle as the country's economy is closely tied to that of the U.S. through trade agreements. Trump, who has vowed to renegotiate the North American Free Trade Agreement if elected, is seen to be a challenger to the existing economic ties between the U.S. and Mexico.
Back in August, the EWW surged more than 6 percent, trading close to its year-to-date high when polls showed that Hillary Clinton was leading, but then fell in September when it looked as though Trump was closing in. The Mexican peso then soared about 2 percent against the dollar following the first presidential debate on September 26, leaving experts to suggest that Clinton was the perceived winner.
On Tuesday, a trader bought 10,000 November 53-strike calls for $0.84 per share or $84 per contract, for a total cost of $840,000. The breakeven for the trade is $53.84, which is 9 percent above the level at which EWW closed on Wednesday, and in line with where the ETF traded a few months ago.
"You see that the ETF has gotten hit over the last month and a half," Nathan said Tuesday on CNBC's "Fast Money." "The breakeven is back towards those August highs here, so this trader is possibly looking for a move back to that level."
Nathan also indicates on a five-year chart of the EWW that the ETF has "found a lot of technical resistance at $55," which EWW hasn't hit since November 2014. But with what he sees as support around the $46 or $47 level, Nathan thinks that EWW could be headed up and the trader could be making a solid pre-election trade.
"[The trader could be] looking for exposure in a bounce in Mexican stocks if Trump were to continue to slide in the polls," added Nathan.
Recent polls show that Clinton enjoys a 5 to 7 percent lead over Trump while EWW has rallied more than 5 percent since the first presidential debate.