The FTSE100 has had a fantastic year, with gains approaching 18% and getting close to the 10,000 mark. This performance is significant, as it could be the best annual result since a 22% gain in 2009, after a difficult year in 2008. Even with global economic challenges, like US tariffs introduced in April and a trade delay, the FTSE100 kept up with other strong indices, such as the German DAX. Its strong performance stands in contrast to the ongoing troubles faced by the UK economy, which struggles with high costs and regulatory pressures.

Sectors Driving Performance

In 2025, sectors such as defense and banking performed well, boosting the FTSE100. Banks, which usually underperform, saw big gains, with Lloyds rising over 75%. Even with interest rate cuts from the Bank of England, banks maintained their profit margins due to decreased capital requirements. On the downside, Marks & Spencer and WPP faced challenges due to cyber-attacks and profit warnings. There have also been significant delistings from the FTSE, like Wise moving to the US, raising concerns about London’s attractiveness as an investment hub. Recent IPO activities have not matched major listings like Magnum Ice Cream in Amsterdam. As the FTSE 100 nears 10,000 before a slight pullback, traders should stay cautiously optimistic. Using options to express a positive outlook for early 2026 is a smart approach, such as buying call spreads aimed at the 10,000 level. This strategy limits risk while potentially benefiting from expected central bank rate cuts in the new year. The gap between the international FTSE 100 and the domestic FTSE 250 is another continuing trend. With the Office for Budget Responsibility recently lowering its 2026 UK growth forecast to just 0.2%, UK-focused companies will continue to face pressure. A pairs trade of going long FTSE 100 futures while shorting FTSE 250 futures is still an attractive way to capitalize on this economic weakness.

Strategies for 2026

For sectors that are thriving, banks like Lloyds have had a remarkable year, with stock prices up over 75%. As we approach the end of the year, it’s wise to protect these gains. Traders could consider using a collar strategy by selling an out-of-the-money call to fund buying a protective put. This secures profits while allowing some upside if the rally continues into January. We also see potential in underperforming stocks, such as Diageo, now trading at 10-year lows. A key change is coming as new CEO Dave Lewis takes the reins in January, which could spark a turnaround. Purchasing inexpensive, out-of-the-money call options for the first quarter of 2026 is a low-cost way to prepare for a potential recovery. In the US, worries about an AI bubble are causing volatility, creating new opportunities. For instance, implied volatility on major tech stocks like Nvidia spiked by 30% in late November, reflecting trader uncertainty. Positioning for a possible sector shakeout in 2026 using straddles or strangles on the Nasdaq 100 could be profitable, as it takes advantage of significant price moves in either direction. While the market has largely accounted for further rate cuts from the Bank of England, indicated by current SONIA futures contracts, this offers a supportive base for equities. This environment makes selling out-of-the-money puts on solid, dividend-paying FTSE 100 companies an attractive way to generate income. Traders can collect premiums while also potentially acquiring quality stocks at lower prices if the market dips. Create your live VT Markets account and start trading now.

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