How to make money off of the British election

Profiting off the British election

Election season is in full swing in the United Kingdom. And with so much up in the air, traders are trying to find ways to capitalize on the uncertainty.

With his Conservative Party, David Cameron is campaigning to defend his prime minister position, but faces a tough challenge from the Labour Party and its leader, Ed Miliband. Complicating matters are the presence of strong candidates from the UK Independence Party, led by the brash Nigel Farage, and the Liberal Democrats, led by Nick Clegg.

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The race is so tight, in fact, that many recent polls show no party capturing more than a third of the vote. And Cameron and Miliband have each warned of "chaos" if the election doesn't go their respective ways.

Noting that the British pound fell sharply against the dollar after the 2010 election, when no party won a clear majority in Parliament, Kathy Lien of BK Asset Management says investors would be wise to play for a similar outcome this time around. That means she wants to be short the pound, and long pound volatility.

"What makes this election different from 2010 is that there could be a power grab by some of the smaller parties, and that could lead to a hung Parliament, which could translate into more uncertainty and greater volatility for sterling," she said.

Oliver Harvey, a FX strategist with Deutsche Bank, similarly recommends using options strategies to bet on more volatility for the pound.

"Since the start of the year we have recommended buying GBP vol ahead of the UK general election, specifically through a EUR/GBP risk reversal and GBP/USD puts. Since then, UK vols have advanced steadily. ... Is vol now too expensive? We think there is still value at the front end," Harvey wrote in a recent note to clients.

"Uncertainty over the result have increased further with the Conservatives and Labour now neck and neck in national polls and huge question marks over the performance of smaller parties. It is likely that up to election night itself there remains little clarity about the result," he continued.

And given the interparty machinations, "the immediate aftermath may be very messy."

With continued uncertainty almost certain, then, anyone long the pound could be in for a rocky ride.

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