Mounting positive skews in 2m implied volatilities suggests RKO calls, the USD/CAD 2-3m skew has been bid with Trump progresses in the polls, lifting it to its highest level since June 2015.

This increases the implied probability that USDCAD would trade at a higher level so that a topside KO barrier would massively discount the cost of a vanilla call.

From the nutshell showing delta risk reversals of USDCAD, you can probably make out that the pair has been one of the most expensive pairs to be hedged for upside risks as it indicates calls have been relatively costlier over puts which indicate upside risks of spot FX is anticipated and hedging for such risks is relatively more expensive.

We set a KO at 1.40, a level very unlikely to be met in the next two months as the spot visited higher levels only when the oil prices collapsed below $30/bbl in January, a development highly unlikely from the current $45-50 range.

The 2m tenor is appropriate as the option expires in mid-November, capturing the market reaction of the week following the 8 November election, and hedging the immediate reaction to a Trump victory for three times less than the vanilla cost.

The execution: at spot ref: 1.3170, bidding on 3m risk reversals, initiate longs in USDCAD 2m call strike 1.34 knock-out 1.40 Indicative offer: 0.27% (vs 0.93% for the vanilla).