The temperature re: potential strikes by the US on Iran is still quite high, and there’s a chunk of circumstantial evidence and reports that a strike was actually called off last week. Trump had passed comment that hundreds of executions had been called off, so he was less interested in interfering as a result – this signaled a dramatic reduction in presumed likelihood of a strike, but it’s still a possibility.
I think that for markets such as US strikes Iran by…?, people incorrectly price probabilities. Here are the current prices at the time of writing this post:
| Deadline | YES | NO | Volume |
|---|---|---|---|
| January 18 | 1% | 99% | $4.76M |
| January 23 | 9% | 92% | $3.05M |
| January 31 | 25% | 76% | $12.95M |
| March 31 | 52% | 49% | $2.24M |
| June 30 | 61% | 40% | $1.32M |
The situation in Iran seems to have calmed down in terms of total protests and deaths – basically, we’ve hit peak awfulness and now we’re likely to see a return to normalcy. Iranian protests are common, but the play here is to expect things to be far more stable by the end of the week. The 18th is almost over here, so there are 5 full days before the January 23 market closes.
Now I could just purchase the March 31 market and be done with it, expecting a (relatively) quick drop over the next week or so to 25%, followed by a slower fall that drops around 1% every day. But if we want to be a little bit safer, we can take what I think is going to be a nice hedging strategy that limits risk but still gives us some upside.
I’ve purchased 800 shares at 9c for Jan 23 Yes and 1,600 shares at 51c for March 31 No. If Trump doesn’t say much about Iran Monday through to Thursday, I expect both of these markets to rapidly change in terms of pricing, and they won’t match up (i.e. the increase on March 31 No will be greater than the drop on Jan 23 Yes). I’m not sure what the sweet spot is for switching out Jan 23 Yes for Jan 31 Yes, but I might do that too if I really want to play it safe.
Of course, there could be a second wave of protests, or indeed an actual strike – there are a lot of unknowns at the moment, and that’s why I like a hedged strategy. I likely won’t hold these positions until Friday (Jan 23), but instead cash out early for a small profit. I like liquidity.
