How to Trade the Iran – US War
I was going to write a new 3 tips for day trading options article (part deux) but with the Iran/US war dominating headlines, media coverage and in the minds of traders, I felt it best to cover various trade ideas and tactics due to what is front and center.
I’d like to start off with some key data points, talking about where capital is flowing (and where its not), then explore the decision tree you want to be thinking about, and what tickers you need to be watching.
Let’s dive in.
Key Data Points for the Iran/US War
The Iran/US war started on Feb 28th with the first day the markets could react being Mar 1st which was Asia, then the EU, then the US markets. As you can see from the chart below, the 20 yr US government bond yields have risen sharply from 4.54% to 4.85 as of this writing.
This is important because as long as there’s volatility in bonds, there will be volatility in equities. The same holds true for WTI (West Texas Crude) chart below.
What holds true for bonds (volatility in bonds = volatility in equities) also holds true for…equities. As long as we have volatility in the price of crude, we’ll have volatility in the markets.
NOTE: If there was ever an argument to shift away from fossil fuels, this war is providing a definitive reason why.
The problem with oil prices being volatile is that the Strait of Hormuz (which is only ~10 miles wide, and Iran controls half of it), is a choke point that Iran is going to fully leverage. In fact, one could say, its one of their primary military goals in this conflict – control the Strait of Hormuz to keep the pressure on the US/GCC to get them to back down. And it is something they can control easily, with small/fast boats, jet ski’s with guns on them, mines, and drones. No amount of air attack will eliminate the threat Iran poses here.
Thus, traders should be expecting volatility in oil as long as this conflict remains. Considering 20% of the global supply of oil goes through this Strait of Hormuz, it will be a massive lynchpin in this war.
Hence, whether you like it or not, we’re all oil traders now. The good thing is Trump definitely Taco’d when WTI spiked to $112 a barrel.
Trading tactic: Watch $WTI, $USO and LNG (via $BOIL) each day to get clues how the market is moving on the day. $85 WTI is ‘digestible’ but ‘challenging for a global economy still dependent upon crude. $112+ is not and $150 becomes incredibly painful to where it could bring the global economy to a halt. The higher WTI goes, the more leverage Iran has over the US.
FYI, Asia imports most of its oil, along with the EU, particularly from the ME (Middle East) so right now the EU and Asia are hurting economically from this.
The last key data point I’d like to mention is $VIX (volatility index for the S&P 500).
$VIX 5 minute chart
Decision Tree + Trading Tactics for the Iran/US War
Remember how I said we’re all oil traders now? There’s a second part to this. That we’re all day traders now (or medium/long term swing traders) as the US administration is giving mixed signals (at best) as to what this war is about and what the goals are.
Is it regime change?
To stop a nuclear Iran?
To destroy their ballistic missiles?
Is it going to last a few days (initial assessment)?
3-4 weeks?
Or a ‘forever’ war?
The communication out of the WH (White House) has been all over the map, Trump even said (ahem…Taco’d) on Monday “I think the Iran war is pretty much over…” This shows Trump is carefully watching the markets, and if anything can make him Taco, it’s the markets.
With no regime change in place, will Trump declare victory? I think a rat on meth might be more predictable than Trump’s mind on this war, but the bottom line is Trump can swing the markets in either direction with a tweet. Considering how changing his mind seems to be a regular thing, we suggest avoiding short term swing trades (days to a few weeks).
Holding short term swing trades overnight is hazardous at its worst, and foolish at best. We suggest tactically day trading for now (to avoid overnight risk) or setting up medium to long term swing trades (May/Jun+ expiries) to ‘smooth’ over the current indecision/fog on this war.
In terms of the decision tree, here are several points to consider below (in no particular order):
- If WTI stays around $85 a barrel, it will be a mild/medium amount of political pressure on Trump, but not enough to force his hand
- If WTI jumps to $112-150 a barrel, the economic + political pressure will be immense and VIX will find its way back to ~$30
- At $200 WTI (extreme scenario), we have a potential lockup of the global economy (similar to COVID 2020 levels)
- Under the last two scenarios above, we like being long $USO or $BOIL via end of MAR or end of APR bull call spreads
- Also under the last two scenarios, Trump either has to de-escalate (with VIX going down) or escalate via a ground invasion (VIX well north of $30). In this scenario, we like being LONG iron condors on VIX
- We’d like to note if Trump puts a decent amount of boots on the ground, the US will lose the war (as it becomes a guerilla war inside Iran), and Trump/Republicans will get killed in the midterms. Bonds will also likely spike (~5% for 20 yr yields). For this, we like trading $TLT (20yr bond ETF) via bear put spreads
- If Iran is resilient enough to withstand boots on the ground, Trump is then faced with the same decision tree (de-escalate and take the L/loss, or escalate) but Iran might want to continue the war till midterms to absolutely punish Trump politically. This would tactically be very smart for them and likely destroy any political capital he has left
- If, however, Trump calls an end to the war in the next few weeks (‘we won this war’) then we think VIX drops to $20 in a jiffy, equities rally for a move up to $700 in $SPY, and bonds/oil comes down. For $SPY, we like end of APR bull call spreads or bear put spreads for VIX
- If somehow this escalated to tactical nukes (what we think is <5% odds) then we have bigger problems to worry about (like WWIII). In this scenario VIX would likely spike to $40-50+ levels, bonds well past 5% and WTI well north of $150. Let’s pray this doesn’t happen
In Closing
We hope we get a de-escalation + end to this war soon. But as traders and investors, we have to manage risk first (especially in this environment) and adjust based on what the market is reacting to (geo-politics for the time being). Hopefully we’ve given you a good decision tree to follow, along with what tickers to focus on, what we suggest doing tactically, and how to trade the Iran-US war for the time being.
If you’d like to learn what we’re trading and looking at for the time being, you’re welcome to join us live in our weekly member webinar. Until then, good luck trading out there and we look forward to working with you soon.