Terror Arbitrage: Put Ali Q to Work for YOU.
So, we know that oil and gold are on a tear, and that the guy at Marginal Portfolio, at least, thinks this is the market saying that dangerous times are coming down the pike.
As it happens, TradeSports.com has futures on, among other things, whether Osama or Zarqawi will be captured by Dec. ’05.
(Because of the website’s design, I can’t post the URL, so you have to go to http://www.tradesports.com/, then navigate to Current Events, then Intl Events.}
Anyway, sure enough, both futures have been tanking. In other words, the “market” (granted, volumes are only like 10,000) is increasingly discounting the likelihood of their captures. Check out the graphs on the far-month contracts. Osama's on top, and Zarqawi's below:
Now here are the oil (top) and gold (bottom) spot prices:
Coincidence?
Well, sort of, yeah. For one thing, such low volumes on the terror futures means that very few people are contributing their opinions (and money) to the market, which makes it inherently inefficient—and probably inaccurate.
Second, as the contract expiration deadline approaches, the probability of the terrorists’ capture gets slimmer, which would drive prices down.
That said, there is almost certainly a correlation between the oil/gas trade and the Osama/Zarqawi trade. After all, news moves the markets. A capture would almost certainly (at least temporarily) lead to a perception of less geopolitical risk, which would be bearish for oil and gold. Gold is a safe haven, and it's worth remembering that Iraqi oil output is at something like 58% of pre-war levels.
Mainly, it seems like a greater share of the general public is now seeing Iraq and the wider war on terror as going less well than it had been. In the states, support for the war in the polls has sunk to LBJ/Vietnam in ’68 levels as the violence in Iraq continues. Meanwhile, the only thing that stopped a second bloodbath in London was the fact that the tangos were abject retards. Everyone knows it could happen again--anywhere.
The point is that negative views on the entire Iraq/terror enterprise would, all else being equal, probably push the Osama/Zarqawi capture futures down, and oil and gold futures up.
So how should one play it all? My personal recommendation would be to short Dec 05 Osama futures and go long about 5x as many 08 Republican Presidential Victory futures as a hedge (those are under “politics”).
If Osama is caught, you're almost sure to get caught in the ensuing short squeeze, especially since there’s so little liquidity in the market. I assume that since it’s a straight bet, you’d be out 100% (I should check on the trading rules). However, your 08 GOP’s should do quite well, and more than make up for the Osama loss.
Assuming Osama is not found, you can collect on the short positions New Year’s Day, and you’ll have plenty of time to unwind the GOP hedge and/or come up with a new one before the race really starts.
As for picking your buy and sell points (independent of the headlines of the day), a rule of thumb I've heard is that the contract price should be roughly proportional to the square root of the time (in days) remaining to expiration. That puts fair value at somewhere around $11.60 today vs a $12.70 actual price as of this writing.
So, what about Zarqawi futures? I think it’s a riskier bet. Unlike Osama (weirdly, when you think about it) we have way, way more people looking for him. This I gather not only from the news, but also from a man who currently works for US intelligence, and who told me so in his back yard over some steaks.
Also, the coalition almost got Zarq earlier in the year (he jumped out of the car they were tracking and ran away). My gut feeling is that he’s more likely to go down than Osama.
A final idea might be to do some kind of Dec 05 Gold vs Dec 05 Osama arbitrage play or something. Lemme think about it some more and get back to you.
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UPDATE: After I wrote this entry, this came over the wires. Shit like this is why I think Zarqawi is more likely than Osama to get pinched.
US confirms death of Zarqawi aide
WASHINGTON (AFX) - A top aide to Abu Musab al-Zarqawi, head of the Al-Qaeda operation in Iraq, who has played a key role in masterminding several high-profile suicide bombing in the country, has been killed by Iraqi security forces, defense officials confirmed Sunday.
Abu Zubair, also known as Mohammed Salah Sultan, was gunned down in the northern city of Mosul Friday, when he got caught in an ambush set up by Iraqi security forces, the officials said, confirming a report by Mosul police. No other details of the operation were provided. But officials pointed out Abu Zubair was wearing a suicide belt filled with metal pellets when he was
killed.
It was not immediately clear whether the suspect intended to become a suicide bomber himself or the belt was to be used by somebody else. Abu Zubair was wanted for his alleged role in organizing a bombing attack on an Iraqi police station in Mosul last month, in which five policemen were killed, according to the defense officials. He was believed to be behind several other bombings directed against US forces and their allies, but the officials offered no specifics.
posted by HAKKIN£N!!!!!!!!!!!!! at 01:59
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