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cdcaveman

Registered: Aug 2011
Posts: 3514

08-07-12 08:13 AM

my advice to you.. is this... take a profit strategy analyzer.. aka a profit grapher for options strategies.. and sit there an plug in all the different options stratgies... debit spread.. dotm (deep out of the money) option... if you think theres going to be a blow out to the upside.. way otm option have the best return.. if your more reasonable... deep itm call against a otm call thats at your target price is could be worth looking at.. with butterflys.. the farther your go otm the cheaper the butterflys...
a more quant view of things would be to take the historical volatility and measure it against how well the implied has been priced up against it.. meaning how often where the options cheaply priced.. my intuition is.. call options have often been very profitable..

The current realized vol/historical vol is 25% right now
long run GARCH forcast is 34%
its trading at relatively low vol right now

it went on a run from 11/16/2011 to 3/28/2012 a 250 dollar 70 percent move up... in 4 months... which your intuition of buying way otm call options would have made you a fortune.. but a butterfly if closed out in the passing by of the stock price would have made money to..

you can't beat an options purchase at a dollar or 50 cents turning into 50 bucks.. there is only one strategy this works for...

another more protective strategy is this... buy a otm butterfly.. and a super way otm ratio backspread.. that way you can be right in both respects..

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TskTsk

Registered: Dec 2011
Posts: 343

08-07-12 11:23 AM

Quote from cdcaveman:
The current realized vol/historical vol is 25% right now
long run GARCH forcast is 34%
its trading at relatively low vol right now

Just a thought on GARCH forecasts, they are inferior to IV in predicting future realized, so probably not of much use. There is some paper on it somewhere.

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cdcaveman

Registered: Aug 2011
Posts: 3514

08-07-12 01:47 PM

i think if you extract out the earnings vol ... it might be a little more.. . do you look at volatility cones at all>?

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