It’s Cheaper to Bet on a Pound Rally and Investors Are Noticing

(Bloomberg) -- Bets on a pound rally after this week’s U.K. election are starting to look like a good deal to some investors.

While the pound has climbed this month since polls point to a win for the ruling Conservatives, many investors in the options market have been covering themselves against the risk of a plunge in sterling. This has made such hedges increasingly expensive, opening up the potential to bet instead on gains at a lower cost.

Pound-dollar calls have made up 62% of the total 36 billion pounds ($47.4 billion) in the notional value of vanilla options on the currency pair since Dec. 1. These calls, giving the right to buy sterling at a fixed date and rate, may reflect some investors preferring to get exposure to a rally through options rather than the spot market, or they may show that traders are starting to take advantage of their relative cheapness.

The pound has strengthened 1.8% against the U.S. currency to above $1.31 this month, as investors grow more confident Prime Minister Boris Johnson can fulfill his campaign promise to “get Brexit done” after the vote on Thursday. Yet one-week risk reversals, a gauge of sentiment and positioning in options, traded Monday at the most bearish since June 2017.

To bet on the pound falling back to $1.27 would cost 0.58% of the notional options value, whereas buying a call to bet on a rally to $1.34 would cost 0.50%, according to Bloomberg calculations based on options pricing.

• NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

To contact the reporter on this story: Vassilis Karamanis in Athens at vkaramanis1@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Neil Chatterjee, William Shaw

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