Pre-election jitters are building and weak-kneed investors are abandoning ship left and right. The small- cap laden Russell 2000 Index is now 8% off its September high and the rest of the big benchmark are following in-kind.

But do you know where risk is perceived to be the highest?

Mexico.

I’ll leave the search for causality up to you, but let’s just go with the obvious and assume its Trump tremors rattling our southern neighbors. If you’re in the dark about how to measure risk for a country, read on and I’ll reveal the mystery.

Each major country has a corresponding exchange traded fund (ETF) that acts as a proxy for it in the financial markets. Here are a few examples:

• EWW – Mexico
• SPY – America
• EWG – Germany
• EWZ – Brazil
• FXI – China

If you want to know how traders feel about a particular country’s health, simply look at the corresponding ETF. Now, what of the perception of risk? It’s not as easy as saying, “Hey, EWG is in a downtrend so I guess everybody things Germany is risky.” No, sir. The way we measure risk on the Street isn’t based on if the price of an asset is rising or falling. Instead, the perception of risk is reflected in volatility expectations. Specifically, the implied volatility.

I just so happen to have the ability to sort my universe of ETFs by implied volatility rank to see which one is the highest.

See how EWW tops the list with an implied rank (IVR) of 93%? Yesterday the reading was at 100% which means option prices for the Mexico ETF were the highest they’ve been all year.

Translation?

The collective wisdom of the investing crowd is saying the EWW is facing more risk now than at any time this year. Is it justified? Beats me.

Trading Mexico

While I’m not going to venture a guess as to whether EWW implodes or skyrockets following the election, I’m confident of three things:

• One. Implied volatility will drop in EWW after the election.
• Two. The best time to sell options is when volatility is high.
• Three. When implied volatility is this high, options are usually overpriced.

Throw it all together and short option plays in EWW are starting to look pretty appealing. How you structure the trade depends on your bias. If you think the fears in Mexico are overblown, maybe sell Dec bull put spreads around $42 or $43. You can go pretty far out-of-the-money and still receive a respectable return.

Alternatively, if you’re willing to wager the Donald-induced pain persists into and following the election, sell EWW bear call spreads around $55 or so.

Traders lacking a directional bias could sell both credit spreads thereby creating an iron condor. That is, sell the bull put around $42 and a bear call around $55. You can thank the elevated implied volatility for allowing you to create such a large profit range.

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