Vol-Regime: when to place the diagonal (and when not)

The 2wk/1wk diagonal (buy 14d far, sell weekly near) is net-LONG vega — it gains when IV rises and bleeds on a vol crush (which is why call & put both lost in the high-IV-then-falling weeks of early Jan). Two fixes were tested on BTC, M2 2024+, split by entry-IV regime (DVOL vs its trailing-90-day median).

1. IV filter — only place the long-vega structure when entry IV is low (room to rise, no crush to suffer).
2. Inverse — flip it: SELL the 14d near-money, BUY a weekly far OTM hedge (= net-SHORT vega), to harvest the crush in high IV.

Result:

• ✓ Idea 1 works (strongly). Long-vega diagonal entered at LOW IV: call ret/DD 7.0 (vs 1.1 at high IV); ~85% of the profit comes from low-IV weeks. Rule: don't place it when IV is high.
• ✗ Idea 2 fails. The inverse loses in every regime (call −67%, put −28%), even high-IV (call −12.6%). Reason: selling a near-money leg in a high-vol asset = short gamma → run over by the big crypto moves; the vol-crush gain doesn't compensate. Flipping the hedge is not the answer.
• The real lesson: the structure is long-vega — gate it on low IV. Harvesting high IV needs far-OTM premium selling (low gamma), NOT a near-money short (that's the gamma killer) — consistent with our finding that crypto's only working MR is vol-MR via far-OTM selling.

Caveat: M2 uses one DVOL with no term structure, so the vega magnitude is indicative; the sign and the regime split are the robust takeaways. R = % of notional.