Let's say you decide to buy a 2Y10Y ATM swaption straddle (i.e. buy 10 million ATM payer swaption and buy 10 million ATM receiver swaption). In order to delta hedge, I believe you would short the 2Y10Y forward swap.

My questions are:

  1. How exactly does this delta hedging work? When do you profit from it (is it when there is a big move in realized volatility in the underlying forward swap)?

  2. What needs to happen in order for you to get a positive payoff from this straddle?

I'm a bit confused on where exactly you're making the profits off of this trade.


1 Answer 1


Technically speaking the delta on a straddle is zero, so you wouldn't be delta hedging anything. However, if you are trading spot premium (and not doing forward premium - which is convention these days) - there will be some discounting curve delta associated that would need to be hedged. Reg 2/ (if you're not actively gamma hedging) what needs to happen is the 10y swap has to move beyond the breakeven yield (straddle premium/10y duration) for you to make money.


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.