Options Strategy Labs: 2007

This system revisits the idea that unusual call option activity often precedes takeovers, buyouts, and other important news. The goal is to anticipate events and enter the market before news hits the Street.

Previous Option Labs (Options Trader, January 2006 and February 2006 issues) scanned the market for signs of call buying — large volume and increased implied volatility (IV). Technical filters were used to ensure the broad market was in an uptrend. After the Labs identified these signals, they compared two bullish strategies over five-, 10-, and 20-day holding periods: buying the underlying stock vs. buying atthe- money (ATM) calls.

This system tests the more profitable approach.