Editor’s Note: The reasoning Jim lays out today — measuring the gap between Kalshi’s 45% odds on an Iran deal and crude oil’s near-100% pricing of one, then acting on that spread rather than on public opinion — is the same framework behind Personal Finance, now in its 51st year of print. His new AI Margin Rotation briefing runs the same playbook on a different expectation gap he sees in today’s market. See the briefing →

I am not a user of Kalshi, a “predictions market” website that allows users to bet on future outcomes of a wide variety of events. I’m not a gambler and I don’t pay enough attention to what is happening outside of the financial markets to feel confident risking my money on anything else.

However, I was intrigued to see that Kalshi users have assigned a 45 percent probability (as of July 1) to the United States and Iran agreeing to a new nuclear deal by the end of this year. That means 55 percent of the people betting on that event think it will not happen by then.

That result contradicts what is happening in the financial markets. Last week in the futures market, the price of a barrel of crude oil sold for less than $68. That is its lowest price since late February, shortly before the outbreak of the war in Iran.

Three months ago, that same barrel of crude oil was going for $112. The fact that it is now back to its pre-war price implies a nearly 100 percent probability that a new deal with Iran will be consummated this year.

But if the Kalshi odds are correct, then oil traders would be hedging their positions accordingly. If we use the 45/55 split referenced above, a price closer to $90 a barrel is what would bring that market into equilibrium.

Preferential Treatment

Admittedly, the reasoning behind that math is suspect. For all I know, Kalshi users don’t know much about oil or politics. Also, oil traders may be hedging their trades so that they do not have as much money at risk as it appears.

However, the expectation gap between those two sets of data points is so wide that I decided to act on it. Last week, I recommended buying a call option on a domestic oil and gas producer in case the war in Iran flares up again.

I hope it doesn’t, but my preferences have no influence on the outcome. Instead, it is the expected outcomes that influence my investment preferences.

I caught some heat for that attitude at the start of this year when I explained “How to Play the Venezuela Takeover.” In that article, I suggested buying shares of the Fidelity Global Commodity Stock Fund (NSDQ: FFGCX) “as a way to play renewed U.S. imperialism to gain control of natural resources outside its national boundaries.”

I got some hate mail about making that recommendation from readers who objected to the way in which the United States exercised its military might to gain control of another country’s oil assets. I also got some love notes from investors who took my advice and realized a 20 percent gain in FFGCX over the next seven weeks as shown in the chart below.

Powerful Response

I do not know how the war in Iran will turn out but I feel oil prices are too low given the circumstances. While officials from Iran and the United States were meeting last week in Qatar to iron out their differences, Iran’s Foreign Minister warned Israel that an attack on his country by them would trigger an “immediate powerful response.”

I hope that doesn’t happen. But if does, I don’t want my investment portfolio to a take a big hit because I acted on emotion instead of reason.

That is why I suggested buying shares of a domestic oil and gas producer to my PF Pro readers last week. I also included a call option recommendation to amplify that result for investors with a higher tolerance for risk and return.

Even if the war in Iran is over, I still like that trade since the company I chose is undervalued and could surprise Wall Street with its next set of quarterly results. And if oil prices do surge higher in the meantime, so much the better.

There’s an ETF for That

I can’t share my specific trade recommendation for my paid subscribers with you, but I can tell you that a simple way to play a resumption of hostilities in the Middle East is the ProShares K-1 Free Crude Oil ETF (CBOE: OILL). It is managed to track the performance of West Texas Intermediate (WTI) crude oil futures.

Six weeks ago, OILK’s share price hit $61. Last week, it fell below $47 on hopes that the war in Iran really is over this time.

However, if a war in the Middle East reignites then OILK could quickly race back up the charts. If it does, then buying a call option on it would amplify that result.

Last week while OILK was priced a little under $47, the call option that expires on November 20 at that strike price could be bought for $4. That makes the breakeven price on this trade $51.

If the Strait of Hormuz closes again and oil prices skyrocket again, I could double or triple my money on this trade. I’d rather wager my money on that type of market-based trade than betting on the outcome of diplomatic negotiations with Iran.

The framework behind this trade is the same one I’ve run throughout my time at Personal Finance: measure the gap between what the market is pricing and what the data actually implies, then act on that gap — not on what the inbox says. Right now, the widest expectation gap I see isn’t in oil or Iran. It’s in the AI trade, where the market still assumes the chipmakers and hyperscalers are where returns will come from. I laid out the counter-thesis — and the portfolio built around it — in my new AI Margin Rotation briefing. Read it — $49 for the first year →