For a brief time in 1991, there was no question that I was going to earn a fortune.
By making a few lucky stock and option trades, I had accumulated a modest sum of trading capital in my brokerage account. Knowing that the United States was about to invade Iraq, I had no doubts that the markets would plunge as fears of Iraq’s weapons and military capacity reached a fever pitch around the globe.
I decided to short the market with all of my meager funds. Knowing that the U.S. would invade any day, buying put options on the S&P 100 index provided the most return for when the market plunged. As fate would have it, my timing on the invasion was dead on — the U.S. launched the first airstrike the day after I purchased the put options.
But I couldn’t have been more wrong with the direction of the market. U.S. stocks skyrocketed on the invasion news. My puts became completely worthless within an hour of the market open.
Talk about a difficult but very valuable lesson. I lost my entire stake on that one very bad trade. I learned never to bet everything on a single idea, no matter how certain you are.
More importantly, I learned that markets hate uncertainty. Financial markets were in turmoil in the weeks leading up to Operation Desert Storm. This uncertainty resulted in very bearish conditions. As soon as the uncertainty was resolved with the invasion, markets responded by surging higher.
To put it simply, uncertainty of any kind creates a very bearish environment for financial markets. At the same time, certainty, even if it’s about something as dire as war, has a very bullish effect on financial markets.
This lesson — buying certainty in geopolitical events and selling uncertainty — has been very valuable to me over the years. The situation in Syria reminds me of this hard-earned lesson, particularly for oil investors.
The United States Oil Fund LP (ETF) (NYSEARCA:USO) has been steadily climbing since April 15. It climbs, then plateaus for a while, then repeats, inching higher all the while. This exchange-traded fund is currently facing upward resistance at $39.50.
The U.S. has made threats to retaliate against Syria for the alleged use of chemical weapons against its own citizens. Syria has been embroiled in a civil war for more than two and a half years. More than 100,000 people have died, with millions more displaced from their homes.