I'm going long with AAPL. I believe there will be significant jump some time in the lat 2012 or early 2012. Was wondering if anyone would give any advise for buying the 2013 Apr call ITM options? Would this be a good idea?
What is your target price for AAPL in April 2013? You could consider a butterfly built around that price. Example: $620.00. Buy 1 $540 Call @ $108.00. Sell 2 $620 Calls @ $61.00 x $122.00. Buy 1 $700 Call @ $31.00. Total Debit: $1700.00. Maximum loss $1700.00 if AAPL is <540 or >700 at expiry. Maximum gain $8000.00 if AAPL is $620.00 at expiry. If your AAPL target price is $650.00 then the body of the butterfly would be at $650.00, and the wings plus/minus a few strikes.
But I'm predicting a bigger move some time in the next 12 months. Say 700. Is butterfly still better than a straight long term call?
Pick some calls and compare it to the butterfly below. APRIL 2013 Buy 1 $620 Call @ $61.00. Sell 2 $700 Calls @ $30.00 x $60.00. Buy 1 $780 Call @ $14.00. Total Debit: $1500.00. Maximum loss $1,500.00 if AAPL is <620 or >780 at expiry. Maximum gain $8,000.00 if AAPL is $700.00 at expiry.
Pros = Cheap entry with wide profit range, Cons = Can't think of any, would need something to compare it to. PS: If you just buy the $620 Calls it will cost you $6,100.00 and if AAPL reaches $700 you get the same $8,000.00. But your gains are not capped like with the butterfly.
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..
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.
i think if you extract out the earnings vol ... it might be a little more.. . do you look at volatility cones at all>?