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Suppose once every 2-3 weeks I have a way to select a few equities that are likely to exhibit higher realized volatility in the future month (relative to the past month). Historically, the average realized vol relative increase on such selections is about 50%, and about 60-70% of the time the selection is correct (i.e. volatility indeed increases).

There is nothing in the forecast about the future implied vol.; the current implied vol. (at the time when a selection is made) is typically somewhat less than the past 30 days historical vol. (stocks being selected are in an up-trend; the methodology anticipates either a strong reversal or some range-bound oscillations in advance, before they happen).

A long straddle would be one of the simplest strategies in this context; however, sometimes there are no dramatic price moves, and the onset of higher vol. happens over 2-3 weeks, making the straddles nearly worthless due to their theta-decay.

What other trading strategies utilizing listed options could help exploit this situation? The underlying equities have modest option interest, thus liquidity constraints are relevant.

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  • $\begingroup$ To clarify: You are expecting the RV for the next 30 days to be higher than RV the previous 30 days but how does the RV you are expecting compare to the current 1 month IV? Trading strategies that consistently predict whether IV is too high/too low/just right are not common and that is essentially what you are looking for. :) $\endgroup$ – amdopt Mar 29 '17 at 13:46
  • $\begingroup$ Thank you @amdopt for succinctly summarizing the challenge; I edited the question with the IV clarification. $\endgroup$ – qcqp Mar 29 '17 at 19:02

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