Delta hedging on EURGBP for reluctant bulls of GBP

UK's CBI Reported Sales MoM is out this morning ahead of a string of Euro data this afternoon. The highlight will be the (ever volatile) durables goods report. The Survey of about 125 retail and wholesale companies is printed 51 against consensus at 18.

Two crucial things to watch out in this week:

• The Queen's speech at the State Opening of Parliament on Wednesday.
  
  
• Estimates of Q1 UK GDP on Friday.

Delta hedging on EUR/GBP:

Let's visualize a trader thought the implied volatility in the near month EUR/GBP option was overpriced; therefore he tends to short the volatility. And suppose we are shorting an ATM put option with an amount of 100,000 EUR.

EUR/GBP Put with a -49,314.67 EUR delta is equivalent to a short 49,314.67 EUR/GBP position in the underlying market. To remove this potential risk taking place when the underlying market moves, we can buy proportionate EUROs against pounds in the spot market.

This allows the delta neutral position. If prediction goes accurate then profit is certain by shorts on call option with nil risk as the market moves around as long as you continue to update the Delta hedge.

But always keep in mind that shorting an option in this case means returns are possible only when volatility falls.