The Brazilian economy likely contracted -2.7% YoY in Q2, and recent momentum leads us to cut our 2015 and 2016 growth forecasts substantially. Demand destruction at home is leading to a correction in the current account balance. Mexico's trade details likely improved in July although the trade balance probably worsened.
We foresee more bullish sentiments as the buying momentum getting intensified which is substantiated by average index oscillator curve, while %K crossover below 80 level states buying interest has been healthy with abundant volume confirmation, current prices are now well above 10 day moving average curve.
Since short term uptrend is anticipated we like to extract the leverage benefits from Call spreads instead of naked calls, buying 15D (1%) in the money 0.5 delta call, while shorting 7D (-1%) out of the money call for a net debit. As the bull put spread is a long position and a net credit strategy, Vega is negative when the position is profitable and positive when the position is unprofitable. It means that an increase in implied volatility is harmful to your position when it is OTM and helpful when your position is ITM.
While USDMXN has been a sell in near term but bullish in medium term, hence bear put spread is devised on this pair.
Bear Put Spread = Long ATM -0.5 delta Put (17.1427) + Sell another -1.75% OTM Put with lower Strike Price with net delta should be at -0.40.
For a net debit bear put spread reduces the cost of hedge by the premium collected and keeps hedger to participate on upward moves but it comes at the expense of Partial hedge rather than a complete hedge.
