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Missed the Brexit Rally? A Racy Bet Backs Both Stocks and Pound

Missed the Brexit Rally? A Racy Bet Backs Both Stocks and Pound

(Bloomberg) -- For traders who missed sterling’s biggest rally in a decade, there may still be a few clever ways to claim a share of the Brexit spoils. Especially if you’re willing to double-down.

Money managers can position for a rise in U.K. equities and the pound through the end of the month -- when Britain is scheduled to leave the European Union -- by buying call options on a $2.3 billion BlackRock Inc. ETF tracking the country’s stocks, according to Macro Risk Advisors and Cowen & Co.

The contracts look particularly appealing right now, the strategists say. While options prices reflect the traditional view that British large-caps will suffer if sterling rallies, the reality is that the relationship has started to fray.

U.K. equities have been rising on both a weakening and strengthening pound lately, making the bullish ETF contracts a cheap way to capture upside should stocks and the currency rally in lockstep, according to MRA.

“This sets up well for buying EWU call options as a way to rent upside if U.K. stocks rally sharply higher on increased hopes for an official Brexit by month-end,” Maxwell Grinacoff, a strategist at the firm, wrote in a note on Tuesday.

Missed the Brexit Rally? A Racy Bet Backs Both Stocks and Pound

Since the start of October, the traditional inverse relationship between British shares and the pound has been weakening. On days when the pound has jumped more than 1% this month, the FTSE 100 has risen or remained little changed.

With both U.K. stocks and sterling gaining in tandem, the dollar-denominated BlackRock fund, ticker EWU, has been outperforming the British equity benchmark as well as the currency-hedged version of the ETF.

Missed the Brexit Rally? A Racy Bet Backs Both Stocks and Pound

A no-deal Brexit on Oct. 31 -- while still possible -- is now far less probable. The EU looks likely to grant another delay by three months, after Parliament blocked Prime Minister Boris Johnson’s plan to rush an agreement with the EU into law.

MRA recommends buying November calls with a strike price of $33 for 20 cents, as well as a $32 straddle for the same month as a pure volatility play. The ETF closed at $32.10 on Tuesday.

Bank of America Corp. strategists have another idea for traders looking to take advantage of the stock-sterling correlation. One way is through index options on euro-zone banks and autos, sectors that have shown the strongest positive correlation with the pound in the past year.

“With a large proportion of investors missing the GBP rally thus far, there will likely be demand to position for further potential positive Brexit news,” strategists led by Anshul Gupta wrote in a Tuesday note.

To contact the reporter on this story: Justina Lee in London at jlee1489@bloomberg.net

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Yakob Peterseil

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