Bloomberg News

Buy Mexico Put Options as Prices Slide to Record Low, BNP Says

June 30, 2011

June 30 (Bloomberg) -- Investors should buy bearish Mexican stock options at record-low levels because the equities may slide “dramatically” as the Federal Reserve ends its stimulus and Europe struggles with its debt crisis, BNP Paribas SA said.

Anand Omprakash, a New York-based equity derivatives strategist, recommended buying September $55 puts to sell the iShares MSCI Mexico Investable Market Index Fund, which rose 1.8 percent to $62.20 yesterday in the U.S. The options are “inexpensive” after the ETF’s implied volatility, the key gauge of option prices, for at-the-money options expiring in three months fell to a record low of 19.76 yesterday, he said.

Mexico’s benchmark IPC index has retreated 5.1 percent this year as worse-than-estimated U.S. reports on jobs and manufacturing fueled concern that the economic recovery is slowing. Latin America’s second-biggest economy, which sends 80 percent of its exports to the U.S., grew 2.4 percent in April, the least since December 2009 and below the median forecast for an expansion of 3 percent in a Bloomberg survey, the national statistics agency said on June 28.

“Mexican equities could be at risk if the current ‘soft patch’ in the U.S. economy persists” through 2011 or causes a recession, Omprakash wrote in a report. “The Mexican economy is heavily dependent on the strength of the U.S. economy.”

The end of the second round of so-called quantitative easing in the U.S. this month, a possible U.S. credit downgrade or default with a breach of the U.S. debt ceiling, the European sovereign debt crisis and tensions in the Middle East could all cause a selloff of Mexican stocks, according to the note.

“A lot of investors are concerned by the various crises that are transpiring right now,” Omprakash said in a telephone interview. “All four of these crises combined make an argument for hedging pretty compelling.”

--With assistance from Andres R. Martinez in Mexico City. Editors: Joanna Ossinger, Allen Wan

To contact the reporters on this story: Cecile Vannucci in New York at cvannucci1@bloomberg.net; Jeff Kearns in New York at jkearns3@bloomberg.net.


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