Sizing Short Strangles by Vega or Premium

Summary

The document asks whether a short-volatility strategy using option strangles should target a fixed premium or a fixed vega, with the aim of improving the strategy’s risk-adjusted return. The responses distinguish the limited premium collected from the exposure taken on: the maximum gain is the premium received, while losses on a short strangle can be theoretically unbounded.

One response argues that volatility exposure is commonly measured and sized through vega, since vega captures sensitivity to implied volatility. The exchange does not provide a comparison of fixed-premium and fixed-vega sizing, a Sharpe analysis, or a detailed risk model. Vega alone also does not describe all short-strangle risks, including underlying-price moves and changes in other option sensitivities. The discussion is therefore a brief framing of position sizing, not evidence that either target maximizes risk-adjusted performance.

Key ideas

• A short strangle’s maximum gain is the premium collected from its option legs.
• The potential loss on a short strangle is theoretically unbounded.
• Vega is a common measure for sizing exposure to changes in implied volatility.
• The document does not compare the Sharpe performance of fixed-premium and fixed-vega approaches.
• Vega sizing does not capture every risk of a short option position.

Tags

# Short volatility strategy using strangles


# Short volatility strategy using strangles












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.

## Answer by Victor123 (score 3)

https://quant.stackexchange.com/a/18061

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.

## Answer by Alex C (score 3)

https://quant.stackexchange.com/a/18068

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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