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For a short volatility strategy using option strangles, is it better to target a fixed premium to earn? Or a fixed vega? Objective is to maximise the return/risk (sharpe) of the strategy.

Any help is much appreciated.

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The risk of a short strangle is theoretically infinite, and the max return is fixed (the premium received on the 2 legs). This remains true whether you target max return or max vega.

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Generally, when you are short volatility, the 'size' of your position is measured using Vega. You have volatility risk, and that risk is Vega. In fact I am not even sure what it means 'to earn a fixed premium'...

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  • $\begingroup$ I think he wants to trade on the volatility risk premium (in the sense of volatility swap payoffs), which is known to be negative. $\endgroup$ – Phun May 30 '15 at 7:28
  • $\begingroup$ OK, I see. If he wants to earn the VRP, then he should definitely look at Vega. But it is not enough, you also have to watch for very bad outcomes that could put you out of business. You have to control the 'risk of ruin'. Not an easy job. $\endgroup$ – Alex C May 30 '15 at 14:12

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