UK Budget 2024

08-03-2024

Following Wednesday’s budget, chancellor Jeremy Hunt announced a £5000 extension to the ISA scheme for investments in British companies in the hope that it might spur investment in the United Kingdom and lead to a rally in the markets in the run-up to the general election.

Whatever the effect of this stimulus, the FTSE has underperformed most major indices over the last year, down 3.3%, and is cheap relative to almost all other global stock market indices. Over the same period the Dow Jones is up 18%, S&P 29%, Nasdaq 41%, Nikkei 39%, CAC 10% and DAX 14%.

Does the UK merit trading at such underperformance? The odds of a Labour government by the end of the year will have already been factored in by most traders, so if you think the FTSE looks cheap in the run-up to the election, and that further government initiatives designed to grow the domestic economy are likely, buying a December 2024 call option would not only give you leveraged upside exposure with the risk defined and limited to the premium paid, but also allow you to take advantage of the FTSE’s currently muted volatility, which is likely to increase as the election draws nearer.

If you think a rally is likely but unlikely to exceed 10% from current levels, you could reduce the cost by buying a call spread instead of a call, in effect financing the cost of the long call option by selling a further out of the money call for the same strike – known as a call spread. Whilst call spreads require a lower initial capital outlay and reduced margin requirement versus an outright long call option, the maximum profit is capped rather than unlimited.