How to trade Middle East war markets
#3 Approach
Hello anons! We are entering a truly wild year. We are barely 3 weeks into 2024 and already we have several developments in the Middle East, extremely heated US elections, NATO chiefs warning against war. Not to mention that this year, roughly 50% of the world population will go to elections. However tough it is to live in the volatile world, we can’t deny that thanks to the internet we live in the age of opportunity. If you follow closely world developments you can actually make money on it vs just staying worried or going for one of the presented narratives.
Volatile times equal enormous opportunity on prediction markets. I expect this year to be a tremendous opportunity to bet on hundreds of markets and make nice money on your convictions. All of this while participating it what will probably be future of polling, geopolitical analysis and general risk prediction. Future is decentralized, bottoms-up, from people to people. Not ruled by corporations. With no fake narratives pushed down our throats. MSM are worthless, with no accountability. You are more careful with our opinions if you can lose money on them. Let’s dive into current situation in the Middle East, possible developments and general framework to trading war / instability / government markets.
Context
As you all know, because as proper degens you spend most of your waking hours online, currently there are several developing situations all across Middle East. To understand the situation first you need to understand who are the main players there. In essence, there are 3 Middle Eastern factions that hate each other to some degree:
Israel ie. American exclave in the Middle East
Sunni Islam countries
Shia Islam countries
Without understanding the dynamics between these players and their motivations, hardships and alliances you will lose your money faster than day-trading options based on wallstreetbets advice. So let’s go one by one with a short description that will shed more light on them.
Israel
First let’s take a look at Israel, what it is and what is its role in the whole Middle Eastern geopolitics theatre.
State of Israel is a relatively new country, formed only in the middle of 20th century. Its roots are in the Zionist movement, which is nothing more than a faction of Jews that believe in forming and developing a Jewish state in historical Canaan / Palestine (not diving into that rabbit hole there). Long story short the creation of the state was enabled by British assistance and in the very beginning, Israel was in several wars with its neighbors. Arab countries didn’t like their territory annexed and fought many wars in those early days. Funny enough, during the very early days it was the USSR which strongly supported Israel, not the US that only began to really support Israel in the 1960s. The military alliance formed and since then (not counting a few misunderstanding between the countries) this alliance gained in strength up to this date, when Israel is essentially US closest ally in the Middle East. The existence of the state of Israel is now essential to US control over Middle East.
Remember that US has large incentives to support Israel as its main ally in the Middle East. Without Israel, US control of the region is severely damaged, without any other country explicitly allowing for US presence in the region. Regardless of the official narrative, you need to understand that this 2 countries work in tandem and the strategic decisions are made jointly. That’s why you see politicians defend Israel. Figure out incentives and you will get ahead.
Sunni vs Shia Islam countries
Sunni islam is the most popular branch of Islam in the world. You can imagine it as Catholicism of Islam. In the effect majority of the countries in the Middle East are Sunni, excluding Iraq and Iran which are Shia. Contrary to what the title might suggest, it’s not strictly religion that makes Sunnis and Shias enemies.
Most important Sunni countries in the Middle East are Saudi Arabia, Jordan and Egypt. Simultaneously these are also the countries that allowed for more support to the US. In the meantime, Iran as the main Shia country is strictly opposed to US presence in the region. There spawns all the hate between the countries.
While Saudi Arabia and other countries try to work with US, Iran wants to actively fight, funding groups like Houthi, Hezbollah and Hamas to hold control of the different regions and press US to always be ready for escalation. And that’s exactly what we have now.
To sum it up for you we have 2 major axis in the region - pro USA and anti USA and among the pro USA we have fully dedicated Israel and most of the Sunni countries that only look for stability in the region without Iran as de facto leader (that’s important - they need to have assurances that if they support anti-US, Iran won’t rule the region). These countries may quickly turn their allegiance given right circumstances. You know, Saudis while allowing for help to Israel and airstrikes on Houthi, at the same time sell oil to China essentially in yuan (through currency swap they signed), are friends with Russia and recently joined BRICS along with Iran. Saudi Arabia is like this mean girl in high school who one time is your friend and the next day stabs you in the back.
Timeline of recent conflicts
So it all started October 7th when Hamas engaged in combined missiles, ground, air and sea attack on Southern Israel, taking numerous hostages and forcing Israel to respond. Around that same time Hezbollah started to increase missiles launches on Northern Israel.
Situation remained fairly stable up until Israel’s ground invasion of Gaza which met with scrutiny from various Arab countries as well as international community due to increasing reports on killing civilians. Appearance of US Navy didn’t help to deescalate tensions. Around that time a few things started to happen:
attacks on US bases in Iraq
attacks on various military bases in Syria
Houthi waging war on Israel and firing missiles on commercial ships going through the red sea as well as military ships
US responding to Houthi attacks with air attacks on positions in Yemen
Missiles attacks between Iran and Pakistan
We can clearly see escalation and a little less clearly the parties to the conflict - US-backed Israel vs Iran and Iranian-backed military groups. Iran vs Pakistan is a bit of an unimportant wild card there - both countries targeted separatists they jointly fight against and probably whole thing was orchestrated to show military strength and control over the region. I do not suspect escalation on this front.
This is only high-level description of the events there. There is a lot more ground to cover in Middle East region - you could probably write a few books about it and it would only cover last century. What is though essential to understand is that it is not some local conflict with poor angry separatists and militias fighting against their perceived injustice. It’s an all out proxy conflict between the big players in the region - US, Israel and Iran. And once the status quo was violated first by Hamas (we can go even further than that and say that status quo was first violated when Saudi Arabia began to think about normalization of relations with Israel), then by ground invasion of Gaza, no party is going to easily back down. Iran won’t allow for increased influence of US and Israel in the region while US and Israel are always for increasing the influence and got fed up being poked by Iran. They will aim to increase their reach in the region to show Iran its place in the pack.
What can happen next and what to bet on
Now we come to the juicy part. How can you use your knowledge, both from this post and any new knowledge you will gain if you read into the conflicts? How to position yourself on the prediction markets? We will analyze possible markets and positions by each axis of conflict:
Israel vs Gaza
Israel vs West Bank
Israel vs Hezbollah
US and US-led coalition vs Houthi
Keep in mind the disclaimer at the end and that we always play with probabilities there. I only point trades that are E(V) positive in my view. You should always do your own research and make your own decisions.
Israel vs Gaza & Israel vs West Bank
Both of these conflicts (with one not really started yet) are essentially not only against Hamas but also against Palestine. Israel since inception aims to control the whole region and recent Hamas escalation only gave them a good excuse to double down on the efforts.
We can expect Israel to move forward in the Gaza Strip and eventually take over the entire region. As for timelines there you can expect at least a few more months before Israel can claim the they control whole Gaza. Ground invasions in the urban regions are though and considering also the vast web of underground tunnels besides countless buildings to cover I can say that invasion is and will be slow, but steady. There is no doubt that IDF is a stronger, better equipped and better funded army than Hamas and eventually they will come out on top. So let’s go point by point and analyze all types of markets that appear now with my opinion on them:
“US call for Gaza ceasefire before X date” - Considering the amount of arms, people and money that were sacrificed to go for and maintain ground invasion I bet there would be no such calls. Only solution there is Hamas surrender or de facto surrender by fleeing the region. My bet is on no such calls for up to end of March for now.
“X leader eliminated by X date” / “X leader ousted by X date” - I’m not a fan of these markets as they are almost impossible to call. While there is some chance to see by social sentiment if a given leader will lose power, the elimination markets are impossible as we are not privy to classified intelligence information. I’m not betting on these markets at all.
“Hamas to lose power in Gaza by X date” - it would be a good market if there were proper rules. For now the rules are very ambiguous making final decision on Yes vs No basically a coin flip. Stay away unless you are an UMA whale.
“Hamas to surrender by X date” - fine markets, but currently no long term ones available. For short term ones for now my bet is no as in point 1, but returns are minimal.
Future West Bank markets - I expect that after securing Gaza, Israel will go for West Bank. If any market appears, I’d bet on Israeli invasion of West Bank in 2024.
Israel vs Hezbollah
I’m going to be very brief here - Hezbollah won’t invade Israel (but there is small possibility for October 7th event type) and Israel won’t invade Lebanon before they have full control over Palestine. So I’m currently betting on no invasion of Israel and no invasion of Lebanon by respectively February and March. But this bets are not without some risk.
Keep in mind that October 7th event can trigger a Yes resolution so stay vigilant on any changes in current behavior. Stop of shooting missiles, increased missiles, further elimination of Hezbollah leaders (or Israeli leaders), basically any change in current status quo can reverse odds in this one.
US and US-led coalition vs Houthi
Currently there is one market only for this axis which is “Houthis strike U.S. military by end of January?”. This is a very interesting market - we are seeing a lot of escalation with Houthis and I believe that currently this market is a bit mispriced. When we go over the rules, they basically say that Houthis have to perform a successful strike of a manned plane or vessel for the market to resolve to Yes so the bar is quite low. Currently you can buy Yes for 0.13 USD per share. At the same time, US can protect its ships very well.
Pure logic says that if you try long enough, eventually you will succeed. I definitely expect at least 1 strike to be successful in the future, especially considering that US will go for large-scale military operation with no end date. If you ask me if they succeed by end of January I’d put 20%-25% chance there as they have been trying for some time already. From my POV Yes is an E(V) positive trade, but I doubt there would be an arbitrage opportunity to sell those shares at 0.20-0.25 USD, so by buying you are going all in to the end.
Conclusion
We covered a lot of ground here today to give you overview of the Middle East situation. As you see situation there is complex and though, especially for the people living there - war is always bad for the people so wish all of them peace with me.
Stay strong and use our wits to get ahead the curve on prediction market front - that’s the future of information and you can get paid for it. I can imagine that future journalists, especially doing analysis and extended reporting, will be independent and getting a chunk of their income from prediction markets. Despite all the volatility, the future looks bright for the right-minded. See you this week for some more narrow down post on interesting market.
Disclaimer
This is not official investment or life advice. Do your own research. This are only my opinions and I encourage anyone to do their own research before putting any money anywhere.