Thanks for the reply but you have over complicated the premise of what they were doing. The short strangles and long straddles netted out in number of contracts held.
While higher action/volatility in the front month is a plus it wasn't a prerequisite.
They only adjusted by buying/selling stock/futures when the price made a larger mover outside of the strangle.
Nah, not over complicated.
As a MM they always wanted to be neutral, also to vega.
Flat skew - > Butterflies (that is short vega with stock at the body) -> buy high vomma wings so that you are vega neutral but long vega convexity. When vol goes down and stock trades at body, you win. When market explodes, you win
Backwarded term structure -> Ratioed calendars (long more long term than short term options). When front vol goes down or time passes, you win. When market explodes and vol goes up, you win.
The goal, however, is to build a position that is stable over a variety of scenarios and covers your ass once the shit hits the fan. Spreads where huge back then and you always wanted to be able to make markets.
More often than not, they ended up with a wonky ass portfolio that had a ton of strikes and terms, but above mentioned positions where the best case
It more or less comes down what Toni Saliba called an explosion position.
And yes, you need favourable term structure and/or skew to make these work. If you...like a tasty trade retailer...buy calendars with the short term vols trading lower than long term vols, you end up with a position that has huge vega and very low theta to balance that.
Vols are mean reverting, so you wanna buy low and sell high...not buy high and sell higher
