Let's visualize a trader thought implied volatility in the near month EUR/GBP option indicates overpriced ATM contracts; therefore he tends to short the volatility. And suppose we are shorting an ATM call option with an amount of 100,000 EUR. Currently, IV of EURGBP and EURUSD is 8.15% and 9.85% respectively.
If the delta is negative 0.5 since this is an ATM EURGBP put option, the amount would be -50,000 EUR in spot outright. To remove this potential risk taking place when the underlying market moves, we can buy 50,000 EUR against pounds in the spot market anticipating euro to go up and take the same position in EURUSD options as it was in EURGBP.
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. For those it is puzzling, just remeber it is because IV's difference that has made relative options overpriced. More the IV, more chances of option prices fluctuations. However, considering the tend in both the pairs one needs to decide hedging position.
