The strategy trades one-week at-the-money EURUSD straddles, using delta-hedging with spot EURUSD. It rebalances when the spot price deviates by a predefined threshold, based on tick and volatility data.
ASSET CLASS: options | REGION: Global | FREQUENCY:
Intraday | MARKET: currencies | KEYWORD: Currency, Delta-Hedging, Strategy
I. 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).
II. 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.
III. SOURCE PAPER
Design and Back-Testing of a Systematic Delta-Hedging Strategy in FX Options Space [Click to Open PDF]
Sorokin, Independent
<Abstract>
This paper describes design and back-testing of an automated delta-hedging strategy applied to short-dated fx options (specifically – weekly and monthly at-the-money EURUSD straddles).
The results indicate that systematic sale of options that are delta-hedged according to the suggested algorithm generates financial gain for the seller with an attractive Sharpe ratio exceeding 3.0 on after-cost basis (back-testing accounts for volatility bid-offer as well as spot market bid-offer).
For weekly options Sharpe ratio significantly depends on the day of week on which the algorithm systematically sells options: delta-hedging of options sold on Thursdays results in highest Sharpe ratio; delta-hedging of options sold on Fridays results in second-best Sharpe ratio.
The performance of the algorithmic strategy is not correlated with linear changes in spot price which is in line with Black-Scholes theory.
The proposed algorithmic strategy has just a few parameters which serves as a natural protection against over-fitting bias. Further fine-tuning of the algorithm requires access to historical data over longer period and/or access to live trading environment.
IV. BACKTEST PERFORMANCE
| Annualised Return | 31.48% |
| Volatility | 10% |
| Beta | N/A |
| Sharpe Ratio | 3.15 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
