Originally Posted by Janabis
Would it make sense to buy deep out of the money options (both puts and calls) with the expectation that the returns will not reflect a normal distribution? Since the nature of social networking helps stories like the Facebook IPO go viral, I would expect very high variance and kurtosis in the distribution of returns. I imagine Facebook statuses all over the world spreading news about the stock like wildfire in the coming months and see the potential for a wildly unpredictable bubble forming with a violent collapse. What would be the most clever way to play that? Is the price of deep out of the money options assuming a normal distribution and effectively discounting the probability of having fat-tails in the returns?
If the Facebook IPO is successful and trading on the shares begin friday the 18th, the first trading day for Facebook options will be Tuesday the 29th (the 28th would actually be the first day the options would be eligible, but thatís Memorial Day).
The options pricing will pretty much determine whether or not your strategy makes sense. Essentially you are a net buyer of volatility (vega), depending on the options pricing you can decide if the options trade at a discount to your expected move.
You might want to look into straddles
In all fairness, it is going to be hard to make a prediction based on vol, since there is no real dataset. Other market participants and market makers will probably jack up iv and vol -> thus adding premium to the options.