Today there was a report that a ship, which was a U.S. Defense Department contractor, fired warning shots at Iranian boats. We don’t know the whole story yet, but it is evident that the Bush administration is trying to provoke a war with Iran. This would be awful as it would probably mean many innocent lives lost.

After this reported incident, oil shot up a couple of dollars. If there is war with Iran, it is hard to say how far up oil will go. It will depend on how extensive the war becomes. Most likely, oil will at least double in price within a short time frame. We should all hope that more war will not happen and we should do our best to speak out against it. But we can’t be certain what the U.S. government will do, so we should be prepared with our investments.

The best way to cover yourself is with an oil call option, but these are very expensive right now. If you are involved with options, then a call option with a long time horizon would work. You could buy something that expires at least a year out and don’t be afraid to get a high strike price because the reason you are getting it is in case there is a war with Iran and oil goes to 200 or 300 dollars a barrel. Think of it as an insurance policy.

If you don’t play the options market, you can buy an energy fund, but it will not respond nearly as much to a jump in oil prices.