UK General Election Trade Idea
11-06-2024
On the 22nd of May, the UK’s Prime Minister Rishi Sunak called a General Election for the 4th of July 2024.
2024 is set to be an election year globally, with over 60 countries going to the polls. Interestingly, several elections that were thought to be a foregone conclusion have already produced unforeseen results.
In India earlier this month, Prime Minister Narendra Modi’s forecast landslide majority fell well short of expectations. In Europe too, results have taken markets by surprise, with French President Emmanuel Macron announcing a snap General Election yesterday (10/06/24). The first round of elections are set to take place on 30 June and 7 July, after his far-right rival Marine Le Pen’s National Rally party won more than 31% of the vote in the EU elections over the weekend, over double that of Macron’s Renaissance party.
Could a similar surprise happen in the UK? Bookies currently have Labour as a clear favourite to win an outright majority, with Ladbrokes (at the time of writing) offering odds of 1/50. Notably, odds for the Conservatives to have an overall majority are 40/1, but No Overall Majority for any party at 12/1.
What can history tell us about hung parliaments? Following the last hung parliament in the 2010 UK General Election, the FTSE 100 experienced a decline of 2.6% on the day after the election, reflecting the market uncertainty due to the inconclusive election result. Investors were concerned about the political instability and its potential impact on the UK economy. Uncertainty over who would form the government and what economic policies would be implemented contributed to the market’s negative reaction. However, the markets stabilised in the following days as a coalition government was formed between the Conservative Party and the Liberal Democrats.
If you believe that an unpolled number of voters may opt to vote tactically for alternative parties, producing no overall majority, you could consider buying short-dated FTSE put options to protect against a sharp market downturn.
Put Option
Trade Idea
Buy a Put
FTSE100 Cash Price = 8203 (as of 11/06/2024 at time of writing)
1(number of contracts) x £1.00 (contract price) x 1000 (contract size) = £1,000
Total consideration of £1,000 (excl. fees and commissions)
A 2.6% decline in the FTSE100 following the General Election as we saw in 2010 (from 8200 to 7986 in this instance) would yield a profit of £1,140 if the FTSE100 expires at 7986 on the 19th of July 2024.
Maximum loss £1000 (excl. fees and commissions)
Defined risk profile, maximum loss of long option positions is equal to the premium paid.
Breakeven if the FTSE100 = 8100 at expiry on 19th July 2024. (strike price minus premium paid)
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