Using the Kelly Criterion to Size a Long-Volatility Allocation

Summary

The question asks how to maintain a portfolio allocation to long volatility through repeatedly purchased straddles while limiting the chance of exhausting the capital assigned to the strategy. The brief answer points to the Kelly criterion as a framework for choosing bet size. It also mentions using a fractional Kelly allocation, such as half Kelly, as a way to reduce sizing risk relative to full Kelly.

The source provides no derivation, inputs, or worked example, and it does not specify how to estimate the probability distribution or expected returns of rolling straddles. Kelly sizing depends on such estimates, so the suggestion alone is not a complete implementation method. It also does not explain how to account for option pricing, transaction costs, changing volatility, or the role of the allocation as a portfolio hedge. Readers should treat it as a pointer to a sizing framework, not a detailed strategy or guarantee of capital preservation.

Key ideas

• The answer suggests the Kelly criterion as a framework for sizing a long-volatility position.
• Fractional Kelly sizing can reduce exposure compared with using the full Kelly allocation.
• The source does not show how to estimate the inputs required for Kelly sizing.
• It gives no specific rules for rolling straddles or managing the hedge allocation over time.

Tags

# Active vol strategy within a portfolio


# Active vol strategy within a portfolio












Suppose I'd like to have 10 % of my portfolio allocated to "long volatility" by rolling straddles .

Obviously going all in on one trade implies significant risk of losing all the money. Does anyone know how one could structure such a strategy i.e some kind of simple way to keep a decent amount of capital over time, I do count on losing some of it since this is suppose to act as a hedge. Or does anyone know a way one could think about how to structure the buys?

## Answer by user24980 (score 2, accepted)

https://quant.stackexchange.com/a/54157

google kelly criterion.

Note whilst some like Buffet follow it in full, some others just take half the sizing to reduce the risks..

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.