Brexit options trade idea: sell $1.235 GBP/USD straddle
IG’s deputy head of volatility, Elliot Harris, explains the rationale behind his Brexit options trade ideas. He proposes selling a $1.235 GBP/USD straddle by selling a $1.235 call and put in unison for 1 November expiry.
The markets are currently implying a 66% chance of a general election before the UK leaves the EU. There is a 75% chance that the UK does not leave on or before the 31 October deadline. Meanwhile, a no-deal Brexit is looking increasingly unlikely in 2019, currently standing at a probability of roughly 20%.
With the chances of a no-deal Brexit steadily fading, GBP volatility has fallen over 4% after a spike to post-referendum highs last week. With an extension to Article 50 looking progressively more likely, GBP/USD arguably could stabilise around current levels.
GBP/USD trade idea: sell $1.235 straddle
Selling the 1.2350 straddle on cable involves selling a $1.235 call and $1.235 put for a total of 380 points for the 1 November expiry. This strategy will be profitable if GBP/USD settles within a $1.197-$1.273 range on 1 November. If volatility continues to soften and GBP/USD settles around these levels, the trade could even be closed out before expiry, taking profit early. The best case is that GBP/USD settles at 1.235. The risk is that the UK Prime Minister Boris Johnson manages to get approval for an election before 31 October, which would likely see a spike in sterling and GBP volatility as well.
An alternative trade idea is to look at GBP calls if there is a belief that a deal can be reached.
GBP/USD trade idea: buy $1.30 calls
If the UK agrees a deal, many analysts believe there will be a sharp rally in GBP/USD, potentially to as high as $1.35. Arguably, buying calls is a relatively cheap way to get exposure to Brexit. Meanwhile, you are shielded from short-term movements unlike if you were to trade the underlying currency pair itself in the spot forex market.
IG launched the 1 November GBP/USD options last week, which have already proved to be very popular as clients look for different ways to get exposure to Brexit. The options desk has seen strong demand for deep out of the money options, both calls and puts with clients looking for a large GBP move at a relatively low cost.
The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.
Discover how to trade the markets
Explore the range of markets you can trade – and learn how they work – with IG Academy's free ’introducing the financial markets’ course.
