CoachThe delta-neutral straddle is the call and the put at the strike where their deltas add to zero; its strike is the default “at the money” for short-dated FX options: with regular deltas and with premium-adjusted ones.
Examples
Example 19.3 (Three-month strikes)
With EURUSD at 1.1464, dollar and euro rates of 3.68% and 2.00% (simple, for three months) and a volatility of 7%, the forward is 1.15119 and the delta-neutral straddle strike 1.15190. For USDJPY at 156.87, with a yen rate of 0.977% and a volatility of 9.5%, the forward is 155.8196; the straddle strike is 155.9955 with regular deltas and 155.6439 with premium-adjusted ones, a gap of 35 pips of 0.01 yen between two definitions of the same “at the money”.