Pulling off the Israeli Straddle

The Tel Aviv Stock exchange “rose to a record high” today, ignoring Prime Minister Netanyahu’s strident denunciations of the deal signed by the P5+1 and Iran which “curb[s] the Iranian nuclear program in exchange for initial sanctions relief.”

The deal gives negotiators six months to craft a settlement which would satisfy Iran’s desire for a peaceful nuclear program and basically the entire rest of the world’s desire to prevent Iran from acquiring the ability to build nuclear weapons. If, after six months, the p5+1 are unsatisfied with the progress at hand, President Obama has indicated, “Washington would turn off the tap of sanctions relief and “ratchet up the pressure”.”

If I’m running a global macro hedge fund right now (as far as I know, I’m not), I’m buying a ton of options on Israeli anythings that come due around the end of May 2014. It’s possible a deal comes before then, but there’s every reason to think these negotiations will take the full six months they’ve been allotted. Given how much he’s invested in making them work, Obama has no reason to pull out early from negotiations. And if Iran is just playing for time it has every incentive to use as much of it as possible. Even if Iran is completely serious, the length of time it took to arrive at this interim deal doesn’t suggest a rapid resolution is in the cards.

All that is a very long way of saying that there seems to be a fairly decent chance Israeli financial instruments move substantially either up or down in six months, and if I were an investor, I would be prepared. Straddle up!