The FTSE100 has had an exceptional year, approaching gains of 18% and nearing the 10,000 mark. This performance is notable as it could be the best annual result since a 22% gain in 2009, bouncing back from a steep decline in 2008.
Despite global economic challenges, like the introduction of US tariffs in April, and a subsequent trade delay, the FTSE100 managed to keep pace with other strong indices like the German DAX. The FTSE100’s strong showing contrasts with the UK economy’s ongoing struggles with high costs and regulatory pressures.
Sectors Driving Performance
In 2025, sectors like defence and banking showed impressive performance, aiding the FTSE100. Banks, traditionally underperformers, experienced gains, with Lloyds achieving over 75% growth. Despite interest rate cuts by the Bank of England, banks have kept their margins intact, assisted by decreased capital requirements.
On the flip side, Marks & Spencer and WPP faced setbacks due to cyber-attacks and profit warnings, respectively. Notably, there have been significant delistings from the FTSE, including Wise moving to the US, raising concerns about London’s appeal as an investment centre. Recent IPO activities haven’t matched the scale of a major listing like Magnum Ice Cream in Amsterdam.
Given the FTSE 100’s strong run in 2025, reaching levels near 10,000 before pulling back, traders should remain cautiously optimistic. We believe using options to express a bullish view for early 2026 is prudent, such as buying call spreads targeting the 10,000 level. This strategy limits risk while capturing potential upside from expected central bank rate cuts in the new year.
The divergence between the international FTSE 100 and the domestic FTSE 250 is a key theme we see continuing. With the Office for Budget Responsibility recently downgrading its 2026 UK growth forecast to just 0.2%, the pressure on UK-focused companies will persist. A pairs trade, going long FTSE 100 futures while shorting FTSE 250 futures, remains a compelling way to exploit this economic weakness.
Strategies for 2026
For winning sectors, banks like Lloyds have had a stellar year, with the stock up over 75%. As we approach year-end, protecting these gains is sensible, and traders could use a collar strategy by selling an out-of-the-money call to finance buying a protective put. This locks in profits while allowing for some further upside should the rally continue into January.
We also see opportunity in stocks that have underperformed, like Diageo, which is trading at 10-year lows. A major catalyst is approaching as new CEO Dave Lewis takes over in January, a scenario that historically can spark a turnaround. Buying cheap, out-of-the-money call options for the first quarter of 2026 offers a low-cost way to position for a potential recovery story.
In the US, fears of an AI bubble are creating volatility, which presents its own opportunities. We saw implied volatility on key tech names like Nvidia spike by 30% in late November, showing nervousness among traders. Positioning for a potential sector shakeout in 2026 using straddles or strangles on the Nasdaq 100 could be profitable, as it benefits from a large price move in either direction.
While the market has largely priced in further rate cuts from the Bank of England, as shown by current SONIA futures contracts, this provides a supportive floor for equities. This backdrop makes selling out-of-the-money puts on strong, dividend-paying FTSE 100 companies an attractive income-generating strategy. It allows traders to collect premium with the possibility of acquiring quality stocks at a lower price if the market dips.
