Abstract
The advent of quantitative investing has made it increasingly important to understand the performance drivers of systematic strategies that use derivatives, such as those based on the sale of options. In this paper we introduce a new formulaic representation to analyse the performance of delta-hedged vanilla options and use this formula to break down the historical performance of foreign exchange straddles held to maturity. We show how, as is widely assumed, the performance is dictated in part by the so-called volatility premium, but also that another important driver is at play, the covariance between the convexity of the option and the prevailing volatility regime. In particular, we determine empirically that the sign of that driver’s contribution is tenor specific. These results can be used to size directional or relative value option strategies and to disentangle the impact of the various performance drivers in the booming field of systematic options strategies.
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