Algorithmic Approach to Delta-Hedging: Researching Realized FX Volatility at Micro Level

Abstract

I present substantially extended back-testing results of the algorithmic approach to delta-hedging described in my earlier paper. Along with previously researched EURUSD straddles I research USDJPY and GBPUSD straddles as well as call and put spread option combinations. Back-tested period is extended from 5 to 7 years.

The results re-confirm previously discovered phenomenon (weekly options sold at the end of the week are ”richer” than the options sold on Monday-Wednesday) and raise new interesting questions: ”cheap” GBPUSD options, substantial skew for USDJPY spread options that realizes at micro level, etc. The results also imply there is the same level of average ”break-even” volatility for all researched FX markets (weekly at-the-money volatility is around 8.8-9.0%), i.e. idiosyncratic element of volatility markets could be overestimated.

Keywords: Statistical Arbitrage, Algorithmic Trading, Delta-Hedging, Volatility, Options, FX

JEL Classification: G12, G14, G10, С00