I'm putting short strangles on the vix and buying OTM calls on this month and the next month for upside insurance & margin reduction. I'm wanting to reduce the positions sensitivity to changes in the implied volatility of VIX (VIX vega) since the bulk of the profits comes from theta(time passage).
My I ask how frequently you sell the strangles and when you roll your hedges?
its just been ad-hoc up until now, I've been thinking about that, and working on a system to implement it.. usually just sell some short time after liquidity becomes available, but I've been thinking that there is some way to formulate it as an optimal stopping problem which maximizes some metric related to the time-varying premium. last time, if i would have waited just 2 days my return for the period would have been quadruple what it was. I have not been doing true hedging in that sense. I am working on understanding the theoretical models first because last time I wasted money by not doing it optimally
From what I understand, you want to hedge that which you do not have a view in. If you have a view, use a model to arrive at a price (use an option pricer to evaluate when to exit). Hold to that price. If it moves against you, think probabilistically. At the current level of volatility what's the likelihood of reaching your target within the time period? Does your view on ex-ante volatility align with your initial view? Etc.
