Currency Option Delta-Hedging Strategy
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Strategy in a nutshell
This strategy trades EURUSD one-week at-the-money straddles, leveraging the currency pair’s high liquidity and low bid-ask spreads. Positions are initiated on Thursdays at 10:00, selling straddles with one week until expiry. The portfolio is delta-hedged using the underlying spot EURUSD to mitigate directional risk.
Rebalancing occurs when spot price movements exceed a predetermined threshold, adjusting the hedge by buying or selling the underlying asset. Data are sourced from Dukascopy (tick data) and Bloomberg (volatility).
Economic rationale
The strategy profits from the volatility risk premium: options’ implied volatility is typically higher than realized volatility, and selling straddles captures premiums while delta-hedging limits directional exposure. Maximum profit is achieved if EURUSD remains near the strike at expiry.