Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
An Update on the End of College… and a New Way to Profit - 16th Sep 21
What Kind of Support and Services Can Your Accountant Provide? Your Main Questions Answered - 16th Sep 21
Consistent performance makes waste a good place to buy stocks - 16th Sep 21
Dow Stock Market Trend Forecasting Neural Nets Pattern Recognition - 15th Sep 21
Eurozone Impact on Gold: The ECB and the Phantom Taper - 15th Sep 21
Fed To Taper into Weakening Economy - 15th Sep 21
Gold Miners: Last of the Summer Wine - 15th Sep 21
How does product development affect a company’s market value? - 15th Sep 21
Types of Investment Property to Become Familiar with - 15th Sep 21
Is This the "Kiss of Death" for the Stocks Bull Market? - 14th Sep 21
Where Are the Stock Market Fireworks? - 14th Sep 21
Play-To-Earn Cryptocurrency Games Gain More and Is Set to Expand - 14th Sep 21
The CashFX TAP Platform - Catering to Bull Investors and Bear Investors Alike - 14th Sep 21
Why every serious investor should be focused on blockchain technology - 13th Sep 21
SPX Base Projection Reached – End of the Line? - 13th Sep 21
There are diverse ways to finance the purchase of a car - 13th Sep 21
6 Tips For Wise Investment - 13th Sep 21 - Mark_Adan
Gold Price Back Below $1,800! - 10th Sep 21
The Inflation/Deflation debate wears on… - 10th Sep 21
Silver Price seen tracking Copper prices higher - 10th Sep 21
The Pitfalls of Not Using a Solicitor for Your Divorce - 10th Sep 21
Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
This Boom-Bust Cycle in US Home Ownership Should Give Home Shoppers Pause - 9th Sep 21
Stock Market September Smackdown Coming Next? - 9th Sep 21 - Monica_Kingsley
Crazy Crypto Markets How to Buy Bitcoin, Litecoin for Half Market Price and Sell for TRIPLE! - 8th Sep 21
Sun Sea and Sand UK Holidays 2021, Scarborough in VR 180 3D! - 8th Sep 21
Bitcoin BTC Price Detailed Trend Forecast Into End 2021 - 8th Sep 21
Hyper Growth Stocks - This billionaire is now using one of our top strategies - 8th Sep 21
6 common trading mistakes to avoid at all costs - 8th Sep 21
US Dollar Upswing, S&P 500 and Nasdaq Outlook - 7th Sep 21
Dovish Assassins of the USD Index - 7th Sep 21
Weak August Payrolls: Why We Should Care - 7th Sep 21
A Mixed Stock Market - Still - 6th Sep 21
Energy Metals Build Momentum; Silver & Platinum May Follow - 6th Sep 21
What‘s Not to Love About Crypto Market Fireworks - 6th Sep 21
Surging US Home Prices and Gold – What’s the Link? - 6th Sep 21
S&P 500 Rallies To New All-Time Highs – Are The Markets About To Break Higher? - 5th Sep 21
Bond Conundrum - Boom or Bust for Gold? - 5th Sep 21
How the sale of a Sting CD sparked an Entire Online Industry - 5th Sep 21
Three Years of Fresh Thinking With Scott Dylan and Dave Antrobus - 5th Sep 21
Bitcoin Bear Market Trend Forecast 2021 and Model Crypto Portfolio Buying Levels - 4th Sep 21
The Most Actively Traded Companies on the Toronto Stock Exchange - 4th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The UK Stocks, Bonds and British Pound Elections and Volatility Analysis

ElectionOracle / Financial Markets 2010 Apr 09, 2010 - 06:25 AM GMT

By: Seven_Days_Ahead


Best Financial Markets Analysis ArticleWith volatility across all asset classes globally at or near recent lows the question is: where is volatility going now? Normally, an options trader uses low volatility to build up long positions ( going ‘long premium’)  in the options market as increasing volatility drags up option prices. However, since the start of 2010 options traders who have used any sell-off in volatility to buy options have lost out in most cases as volatility has just fallen further.

With this week’s announcement that the UK general election will take place on 6th May, I would like to take a closer look as to what might be the consequences of the markets of various situations and outcomes on volatility and therefore on option prices.

To start off, I have included three diagrams of historical implied volatility on both the FTSE100, the 10 – Year Gilt future and historical 30 day volatility for the GBP/USD exchange rate. In all cases it is clear that volatility has fallen quite significantly and remains historically low. Although GBP/USD has risen in recent times, it is still low in the historical context.

Source - Bloomberg

Source: Bloomberg

Source: Bloomberg

How will the UK election affect volatility among these asset classes: equity, bond and currency?

There are two possible outcomes: one party will have a clear victory or no clear victory leading to a hung parliament.

In the case of one party achieving a clear victory we would not expect a big move in volatility as it will take time for the new government to formulate and introduce any new economic policy.

However, if there is a hung parliament it is quite likely that volatility will increase quickly. The reason for this is simply that the UK is not used to hung parliaments or coalition governments and this will therefore increase uncertainty.

Also, volatility is quite likely to increase in the time leading up to polling day as various different opinion polls show different outcomes. The closer the parties are tied the more the increase can be expected.

However, as we all know the only true and real opinion poll is the actual vote. Therefore, we can turn to the old saying “buy the rumour and sell the fact”. This implies it may well make sense to buy options at this early stage of the campaign and then sell the options when the result comes in at which stage the market will probably start discounting the reality of the new government however, it may turn out to be and UK markets will return to normal.

In the coming days Seven Days Ahead will looking for any opportunities to use to go long volatility in the UK market.

Of the three asset classes we prefer the Gilt market. The reason why the Gilt market will most likely see the biggest move is two-fold.

Firstly currently bonds are already at high levels in terms of price (low yields) therefore a sell off is quite possible.

Secondly, no matter what type of government takes over after the election, one of their biggest priorities is going to have to be tackling the public deficit. This may well add further to Gilt issuance which will have the affect of forcing yields higher (prices lower) over time. This therefore makes

Gilts are a good candidate for a long options strategy.

The main reason why we choose not to focus on the FTSE in the current environment is the fact that the FTSE is an extremely internationally-focused equity index. If we look at some of the largest holdings in the index such as Shell, BP, Rio Tinto and BHP for example they all have very little to do with the domestic UK economy.

Mark Sturdy
John Lewis

Seven Days Ahead
Be sure to sign up for and receive these articles automatically at Market Updates

Mark Sturdy, John Lewis & Philip Allwright, write exclusively for Seven Days Ahead a regulated financial advisor selling professional-level technical and macro analysis and high-performing trade recommendations with detailed risk control for banks, hedge funds, and expert private investors around the world. Check out our subscriptions.

© 2010 Copyright Seven Days Ahead - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Seven Days Ahead Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in