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.

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