For investors seeking the most pragmatically cynical play, it’s tough not to consider the crude oil market. On Friday, oil prices soared amid worries about escalating violence in the Middle East, with Israel launching an attack on Iranian nuclear and military targets. Fundamentally, the anxieties center on the potential disruption of crude flows around the world. In turn, several hydrocarbon specialists have witnessed a valuation spike.

Among the top beneficiaries is Kosmos Energy (KOS). Operating in the exploration and production segment of the hydrocarbon value chain, Kosmos focuses on underexplored regions in Africa. One of the smaller enterprises in the field, the company carries a market capitalization of a little over $1 billion. Further, KOS stock is priced at $2.25 as of Friday’s close, making it incredibly speculative.

Still, with the geopolitical winds churning “favorably” (at least in terms of renewed interest in fossil fuels), Kosmos could be worth a look for risk-tolerant speculators. True, the performance of KOS stock has been terrible this year, losing more than 34% since the January opener. At the same time, over the past five sessions, the security gained over 17% of market value.

Another interesting development is that it has attracted interest among options traders. In the modern financial ecosystem, options largely represent the domain of professional investors. These folks tend to have access to more information and resources, making their transactions noteworthy.

To be sure, one must take unusual options activity with a grain of salt. Still, the data shows that on Friday, total derivatives volume reached 5,773 contracts, representing a 230.83% lift over the trailing one-month average. Further, call volume was 4,864 contracts versus put volume of 909, generating a ratio of around 0.19.

With more calls being engaged than puts, it’s possible — though difficult to determine with certainty — that sentiment for KOS stock is bullish. Fortunately, the statistical argument adds further weight toward the optimistic view.

Using Empirical Data to Craft an Upside Strategy for KOS Stock

Under most practical applications, there are two types of probabilities: derivative and conditional. The former approach is retrospective, calculating odds based on a known aggregate outcome or distribution over a dataset. On the flipside, the latter approach is situational or state-based, isolating a subset of history that matches a current condition and subsequently calculating the forward probability.

In financial analysis — whether that be the technical or fundamental framework — practitioners largely calculate derivative probabilities (if they’re calculating probabilities at all). For example, quantitatively minded technical analysts will backtest indicators such as MACD crossovers to determine their success ratio. So, if a crossover is successful 56% of the time in identifying an upward movement, this model may be useful for traders.

However, the problem is that this 56% success rate is an aggregate ratio over the entire dataset. It doesn’t calculate what I would call the “probability of the now.” In other words, what are the odds that the security in question rises when the MACD crossover occurs now? Depending on the sentiment regime, the probability of the now could be above or below the baseline.

This is one of the key reasons why I prefer discretizing the chaos of price discovery into binary sequences of accumulative and distributive sessions. Yes, pricing behavior becomes compressed into simple up/down sequences. However, the balance of this binary code — or market breadth — over a given length of time can be categorized and quantified, enabling and empowering conditional probabilities.

For example, in the past two months, KOS stock printed a “4-6-U” sequence: four up weeks, six down weeks, with a net positive trajectory across the 10-week period. Over the trailing decade, this pattern has only materialized 26 times. But in 65.38% of cases, the following week’s price action results in upside, with a median return of 4.56%

As stated earlier, KOS stock closed on Friday at $2.25. If the 4-6-U sequence pans out as projected, the security could hit $2.35 relatively quickly. Should the bulls maintain control of the market, it wouldn’t be surprising to see KOS reach for the psychologically significant $2.50 level. Plus, the favorable fundamentals (again, for the oil sector specifically) could provide an additional boost.

A Rational Call Spread to Consider

For those seeking a low-cost idea in the hydrocarbon space, the 2.00/2.50 bull call spread expiring July 18 could be enticing. This transaction involves buying the $2 call and simultaneously selling the $2.50 call, for a net debit paid of $30. Should KOS stock rise through the short strike price of $2.50 at expiration, the maximum reward is $20, a payout of almost 67%.

Primarily, what makes this trade attractive is the pivot in sentiment regime. As a baseline, the chance that a long position in KOS stock will be profitable is only 47.07%. That means that KOS suffers from a negative bias. However, the rare 4-6-U sequence features conditional odds of 65.38%.

To be clear, the 65.38% odds speak to whether or not KOS stock will rise; it doesn’t say anything about its projected magnitude. Still, based on past empirical data, if the bulls win the discussion next week, the share price is projected to land around $2.35.

But with the latest news? This forecast could be understated, making KOS stock a must-watch asset.