I had 50% odds on a strike. Should I have bought oil?

I thought I was early on calling the Israel strike on Iran. If I had bought call options on oil, I would have made money, right? But I wanted to check if it made sense and how to recognize if I even had an edge.

The night before the strike, US military dependents were leaving the Middle East and embassies were ordered to report emergency action plans. Eigenrobot was posting that GPT was predicting a strike and that got my attention. Polymarket odds were at 46%.

I thought, if I see a 46% probability of a strike, and oil jumps if a strike happens, would it have made sense if I bought oil that night?

Timeline

Notice:

• June 11, 6pm: Oil jumps from $64 to $67
• June 11, 9pm: Polymarket odds reach 46%
• June 12, 6pm: Israel strikes, odds hit 99%, oil spikes to $71.

The oil market moved before Polymarket. If I had traded oil when Polymarket hit 46%, I would have bought after the move, not before. Prediction markets were lagging here.

But isn't there uncertainty in the oil market?

edit: I later realized this relies on knowing the post-strike price, making it a retrospective justification rather than a forward-looking model. I plan to update it to an ex ante version.

Suppose you believe 50% chance of a strike. Oil's expected price is

(50% x $71) + (50% x $64) = $67.50

If oil's trading at $67, then the "war premium" is already priced in. If the strike happens, price spikes to $71. If not, it drops back to $64. And that's basically what the market did.

To get positive expected value, I would have to buy call options before the oil market priced in the risk or have better information than the markets. By the time Polymarket got to 46%, oil had already priced in the risk.

Also, call options get more expensive when volatility is expected, so I would be paying more for uncertainty that everyone already knows.

Soo...

in conclusion, shucks, I didn't have an edge. Prediction market odds are not automatically alpha vs real world markets. In this case, they were behind. And trading on them would have been negative-EV. But it was a useful (and humbling) lesson on market efficiency and not overrating my private info.

References

Eigenrobot post at https://x.com/eigenrobot/status/1932943445057831281. Forecasting post at https://peterwildeford.substack.com/p/the-fordow-paradox-where-do-iran.

Polymarket at https://polymarket.com/event/israel-military-action-against-iran-before-july.

Time in WTI Oil Futures CLW00 screenshot is in EDT, all else in Pacific.