LONDON- Sterling tiptoed higher on Wednesday after British Prime Minister Boris Johnson won parliamentary approval to hold a general election in December though moves were tiny as large currency options expiring this week kept volatility subdued.

More than $2 billion worth of currency options with a strike price of around $1.29 and billions more between $1.24 to $1.32 are expiring on Oct. 31, an original Brexit deadline, according to Refinitiv data.

The presence of such large derivative contracts means that banks and hedge funds would try to reduce overall market volatility in the pound as it could otherwise trigger these massive options and unleash large market moves.

As a result, overall market volatility in the pound has dropped to less than 7% as traders have stepped back from trading the pound actively, more than halving from a peak of 14% earlier this month, a near 2019 high.

Johnson, who has failed to deliver on his "do or die" promise that Britain would leave the bloc on Oct. 31, secured the election agreement for mid-December just hours after the EU granted a third delay to Brexit. 

"Johnson has cross-party support and (the opposition) Labour Party has lost a fair lot of the credibility it had in the 2017 election," Derek Halpenny, European head of global markets research at MUFG, said.

"So that's reflected in the stability in sterling - markets believe the Conservative party will hold on to power and have a Brexit deal agreed with the EU."

The pound was up 0.1% against both the euro, at 86.29 pence, and the dollar, at $1.2886, as the market assessed risks associated with the election, which will be held on Dec. 12.

The outcome of a U.S. Federal Reserve meeting later on Wednesday is also keeping overall market volatility subdued.

The pound has rallied almost 5% so far in October, boosted in the week leading up to the EU summit where a new Brexit deal was approved. Johnson pushed for the election in response to being unable to get this deal through parliament. 

While the risk of a no-deal Brexit had been taken off the table by most analysts, there is a risk that a Conservative win would embolden the pro-Brexit faction of the party who would push for a more damaging break from the EU.

"It is not certain whether the deeply divided electorate will give a clear mandate for a particular direction in the Brexit process," Commerzbank analyst Antje Praefcke said in a note.

Michael Hewson, chief market strategist at CMC Markets, said "The pound will move on any move in opinion polls between now and the election. Whether we get a hung parliament or a Corbyn majority or a Tory (Conservative) majority is not clear."

"(The) pound is likely to trade (between) $1.25 and $1.30 between now and then but it will be a bumpy ride," he said.

(Reporting by Elizabeth Howcroft; Editing by Dale Hudson and Ken Ferris) ((Elizabeth.howcroft@thomsonreuters.com; +442075422684;))