Let's say I am predicting the realised volatility of a stock index. I am buying or selling straddles based on whether the predicted vol is higher or lower than the implied ATM volatility for the maturity. I am delta hedging along the way and potentially rolling the strikes if my options are moving too far away from ATM due to spot moves. If my prediction is good, my "Gamma Theta PnL" from this strategy should be positive. However, there is still Vega PnL and I do not want exposure to this. Is there a way to hedge out Vega PnL, so that my PnL is mostly driven by Gamma and Theta? What do people usually do in the market? I was thinking of using a vol swap or variance swap, but could imagine that this would be very expensive in terms of transaction fees.
Use calendar spreads. If implieds are high vs your prediction, sell short dated straddles, buy longer dated straddles, vega neutral. If implieds are lower vs your prediction, buy short dated straddles, sell longer dated straddles, vega neutral. Your short dated straddles will have more gamma (and theta) than your longer dated straddle positions and therefore you will have net gamma (and theta) exposure but be vega neutral. You will be approximately vega neutral by buying and selling the same number of straddles in the calendar spread.