Iranian Retaliation

Big news out of the Middle East this morning: the US assassinated a top Iranian general responsible for Iran’s proxy wars. The Iranian regime is currently coping with severe economic conditions at home, in order to maintain control of the country it must occasionally drum up nationalist support (IE proxy wars, attacking Saudi refineries, hijacking a British oil tanker, etc…).

The brazen killing of a popular public figure by its main geopolitical adversary must beget a response by the regime. Fears of escalation sent markets down this morning, but those concerns have eased. The S&P is up and the VIX has come down. In my view, the market is under-pricing the risk of Iranian retaliation.

Even if this only develops as a small tit for tat, the uncertainty around further escalation will unsettle equity markets in the short term. I am going to play this with a an at-the-money SPY put expiring on Monday. I will go over the economics later.

As my IB account is not up and funded, I will be sizing this quite small — strictly to put my money where my mouth is.

I also considered a VXX call spread, however — during the writing of this post fake news of an Iranian missile strike broke in the US, moving markets lower. I decided to trade the put that I had looked at earlier in the day. (Also the VIX futures curve is quite steep as of writing.)

Note to self: sell put before expiry on Monday if in the money.