Let's visualize a trader thought implied volatility expanding in the near month contract of EUR/AUD put option which is overpriced; therefore he tends to short the volatility.
Suppose, the delta on ATM put options is at -49,433.56.
And suppose we are trying shorting an ATM put option with an amount of 100,000 EUR.
If the delta is negative 0.49 since this is an ATM option, to remove this potential risk when the underlying market moves, we can long around 50,000 EUR against Aussie dollar in the spot market.
This allows the delta neutral position. If prediction goes accurate then profit is certain by longs on put 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.
Currently EURAUD is trading at around 1.4303 levels.
