Espens group (FI/FX prop) has been focusing on selling gamma this year, rather agressively. This sounds very much like somethig they'd do.
Yeah, we figured on the floor it was one of their prop traders and not a customer. His position was essentially long the 111-113 guts (long 113 puts in the money and long 111 calls in the money) and short the 112 straddle. He did this in the Jan expiration 40,000 by 80,000 by 40,000. He did just the Feb 111-112 call 1x2, on 60,000 by 120,000, and then Mar expiration he did the guts vs. straddle again on same count. Was pretty fun to watch, would generally come in one day and get er done. Locals got absolutely crushed on those expirations being long a ton of gamma and it collapsed in their face. Sure he will be back again soon sometime.
Yep, i think in the "new world" of restricted Fannie and Freddie, demand for both gamma and (especially) vega on longer tails will be smaller then before. The right thing to do is probably to sell ATM gamma and buy wings, especially the OTM payers/puts.
i tend to agree with the strategy you suggest but this kind of trade doesn't make for restfull sleep... also you may be right in the end but as you chase your negative gamma up and down while rates trade in a 25 bps range i suspect that benjamin graham's wise words will become relevant "the market can stay irrational longer than you can stay solvent." if we could all just have accrual trading books!