Volatility Trading Environment

Based on the most helpful WSO content, your observation about the challenges in trading volatility in the current environment is spot on. Volatility trading, especially in uncertain times with multiple external catalysts, requires a nuanced approach. Here's some insight:

1. Post-Event Vol Crush: Selling volatility after an event (like tariff announcements) can be tempting due to the expected vol crush. However, as you noted, external catalysts can distort dealer activity and flows, making it riskier than usual. Dealers might hedge differently, and unexpected news can reignite volatility.

2. 0-1 DTE Straddles vs. Longer-Dated Straddles: Your idea of selling 0-1 DTE straddles while going long a straddle dated a week ahead is an interesting gamma harvesting strategy. However, as you correctly pointed out, this setup makes you:

   • Short Gamma: This means you're exposed to sharp moves in the underlying, which can lead to losses if the market moves significantly in either direction.
   • Long Theta: You're earning time decay on the short-dated straddles, but you're also paying for the longer-dated straddle's theta.

   The key issue here is that you're effectively paying to avoid owning convexity. If the market experiences a sharp move, the short gamma exposure can outweigh the benefits of the theta you're collecting. This strategy works best in a range-bound market with low realized volatility, but in a catalyst-heavy environment, it can be risky.

3. External Catalysts and Dealer Flows: The presence of multiple catalysts (e.g., geopolitical events, economic data releases) can lead to unpredictable dealer flows. Dealers might hedge their positions dynamically, which can amplify market moves and make it harder to predict vol behavior.

4. Alternative Approaches:

   • Calendar Spreads: Instead of outright short gamma, consider calendar spreads where you sell near-dated options and buy longer-dated options. This can help you benefit from the vol term structure while reducing some of the risks associated with being short gamma.
   • Tail Risk Hedging: If you're concerned about sharp moves, consider incorporating deep out-of-the-money options to hedge against tail risks. This can provide some protection while allowing you to maintain your core strategy.

In summary, while your strategy has merit in certain conditions, the current environment with high external catalysts might require a more cautious approach. Adjusting for tail risks and considering alternative structures like calendar spreads could help balance the risk-reward profile.

Sources: Trading Ideas: Matter of Edge, Difficulty Check, https://www.wallstreetoasis.com/forum/asset-management/sales-trading-interview-guide-gekkos-guidance-part-2?customgpt=1, A Decade Into IB: Teetering on the Edge of Cataclysm?, Sales & Trading Interview Guide - Gekko's Guidance Part 2