No. of Recommendations: 1
Hi Jim,
Correct me if I am wrong, but the underlying assumption is that the price is "mean-reverting" to the trendline based on a scaled version of book over the past ~20 years. The idea is that when it is very much above trend (as it is right now), then the stock is likely to trend towards the trendline price. As such, the future price should be less than the current one, which would make the in-the-money calls profitable.
My question becomes one of rules of thumb, when the price is so far out of trend, it seems that the trendline + standard deviation as a target is too low, and the put price likewise very far out.
Any recommendations on what to do in this case?
--G
