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.

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

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

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