Thread by @muskk

#Strangles A little note on getting into strangles in a bear market scenario

If you're an intra-day trader selling delta-neutral strangles on non-expiry days in the morning and holding them till day end then be careful of the following when market is expected to be bearish.
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Given short strangles are short vol trades (-ve vega) the view is not just on benefitting from theta but more importantly on vols going down during the day. So in a bearish scenario when vols are expected to go up with market going down your strangle position
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will get affected in the following way:

- Loss due to vols going up with this being a -ve vega position. There are other vol factors that you'll be short on such as skew (below), convexity of the vol surface and these increase as well affecting the position negatively.

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- Assuming you make adjustments to keep delta in check due to index down moves, i.e. shift put strike down, there will be loss due to net position turning delta positive with put vols increasing more than call vols(skew) which in turn leads to put delta increasing more than a
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decrease in call delta (effect from vanna).

Result of the above is your Put SLs keep getting hit but profits on calls will hardly compensate for the loss due to increased vols(calls can even freeze after a point!).

If you keep holding your positions and
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keep making adjustments to perhaps recover/reduce your losses then you can end up with a nightmare scenario where vols keep falling till day-end and you either have to book a loss or choose to hold positions overnight which given it's a bearish scenario can result
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in a huge drawdown next day if market opens gap-down. Pnl from theta will hardly be anywhere near loss from vega in such scenarios.

Better to get out once SLs hit or turn the position into a put ratio on the put side or simply close the whole thing and enter a credit call ratio.