I am trying to work out how to properly size an option strategy to a given target volatility.
Assuming I have \$100 capital and I would like to have a strategy's long-run daily volatility to be \$1 (e.g. buy 1-month 25-delta strangle or risk-reversal). If all the greeks are available, what's the proper procedure to size the daily positions?
For example, I can think of a few possibilities:
estimate the historical volatility of 1 unit strangle/RR and try to size that to \$1.
estimate the historical volatility of the 1M ATM implied vol, and target position's vega volatility to be $1. But this seems only applicable for positions targeting neutral delta.
given an option's return pnl can be sum all the greeks pnl (delta/vega/gamma/theta), we could estimate the historical volatility of the underlying, then compute the position volatility together with daily greeks. The tricky part seems to be estimating the vega change due to underlying change. Perhaps use regression here? And how about the "covariance" between all the greeks?
I am new to this space and helpful recommendation/suggestions are welcome. Thank you.