Trading in pound options spiked to its highest levels since the British currency plunged toward an all-time low in 2022, signaling heightened concerns about the UK’s economic stability. On Wednesday, January 8, trading volumes surged to £13.7 billion ($16.9 billion), nearly three times the previous day’s activity, according to data from the Depository Trust and Clearing Corporation (DTCC). This surge marks the most significant trading day since September 23, 2022, when the pound neared its weakest point as former Prime Minister Liz Truss’s botched mini-budget rocked investor confidence.
Much of the recent trading activity focused on bets against the pound, with some positions speculating a drop to as low as $1.15 — a 7% decline from its current value. Hedge funds have also been actively purchasing downside put options for the pound, known as “cable” in forex parlance, traders reported.
“This year has ushered in significant market volatility, with the UK firmly in focus,” said Sagar Sambrani, a senior foreign-exchange options trader at Nomura in London. “Drawing comparisons to the fiscal sustainability concerns that led to the 2022 currency selloff, digital options targeting the 1.15 to 1.19 range in three- to six-month tenors have become increasingly popular trades.” Sambrani added that euro-sterling call options targeting a 0.85-0.87 range for one to three months were also drawing attention.
The uptick in pound options trading mirrored a broader surge in activity within the $300 billion-plus currency options market, which saw a sharp increase in volatility. On Wednesday, UK government bond yields (gilts) spiked to their highest levels in more than a decade, fueled by growing concerns about inflation and debt sustainability. The situation has further been compounded by fears that potential US tariffs could negatively impact the UK economy.
At one point on Wednesday, the pound fell more than 1% to its lowest level since April. Meanwhile, the cost of hedging against a decline in the pound over the coming week surged, reflecting growing concerns over its near-term prospects. Three-month implied volatility, a key indicator of expected market movement, surged to its highest point since April 2023.
The recent decline in the pound against the dollar has spurred an uptick in demand for bearish put options, said Con Davelis, head of FX option trading at National Australia Bank in Sydney. As a result, implied volatility and the relative price of put options have climbed sharply this week.
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