1) Give them their own state. This is difficult for quite many reasons, and Israel (by which I mean the current government) doesn't want that
2) Give them full citizenship rights equal to Israel's citizens, make sure they have a proper minority representation, and let them participate in the regular political processes. The current government certainly doesn't want that, and I have no idea what part of the Palestinians would want that.
3) Continue to treat them as sub-human, and deal with the consequences of the hatred that fosters. That seems to have been the "strategy" before October last year.
4) Try to exterminate or exile them, or at least decimating them to such an extend that the problem becomes smaller.
Since 1) and 2) are (again, from the perspective of Isreal's government) undesirable, and 3) has stopped working, 4) seems to be their current strategy.
The problem with understanding this situation is that it probably has more to do with Israel's internal politics than what the situation looks like on the ground in Gaza and elsewhere. Just a quick read from the wikipedia page should give an idea just how corrupt the situation really is.
There's also the fact that Palestinians aren't a homogenous group in any sense of the word. That makes it hard for them to unite under any political flag. It also doesn't help that the borders are all closed, from both sides, and no neighboring country are willing to accept them.
From the outside the situation certainly looks very bleak.