Via LabsPerpetuals and Options
Perpetual contracts, similar to futures contracts in traditional finance, allow traders to speculate on the underlying assets with leverage without worrying about expiration dates or delivery risks. Traders deposit a margin to trade these contracts, and they can take both long and short positions on the assets. Perpetual contracts are implemented in various ways, ranging from centralized exchanges to decentralized exchanges (DEXs), but they typically share four key elements:Mark Price: This r...
Via LabsAlly, Retrodrop and Via Labs
We spent two years developing Via Protocol, a cross-chain aggregator that helps users find the best ways to trade and transfer tokens across chains and protocols in the DeFi world. After many nights of hard work and long discussions, we had a finished product, which gained some good traction and, among other achievements, ranked second in the Web3 product of the year in the Golden Kitty Award 2022 by Product Hunt. Over time, however, we observed a significant decrease in aggregator usage acro...
Via LabsWhat is Via, and what is V3?
What is Via, and how does its aggregation work?When we talk about the best router, we don't want to get two or three DEXs and a few bridges. Instead, we want to know all the possible options for transferring token A on chain X to token B on chain Y. That's why we created our Via Router, aggregating more ‘DEXs, bridges, and chains than any other project, to ensure users can find the best routes with the most liquidity and cheapest fees, to swap their tokens across chainsFirst, our ro...
Via LabsPerpetuals and Options
Perpetual contracts, similar to futures contracts in traditional finance, allow traders to speculate on the underlying assets with leverage without worrying about expiration dates or delivery risks. Traders deposit a margin to trade these contracts, and they can take both long and short positions on the assets. Perpetual contracts are implemented in various ways, ranging from centralized exchanges to decentralized exchanges (DEXs), but they typically share four key elements:Mark Price: This r...
Via LabsAlly, Retrodrop and Via Labs
We spent two years developing Via Protocol, a cross-chain aggregator that helps users find the best ways to trade and transfer tokens across chains and protocols in the DeFi world. After many nights of hard work and long discussions, we had a finished product, which gained some good traction and, among other achievements, ranked second in the Web3 product of the year in the Golden Kitty Award 2022 by Product Hunt. Over time, however, we observed a significant decrease in aggregator usage acro...
Via LabsWhat is Via, and what is V3?
What is Via, and how does its aggregation work?When we talk about the best router, we don't want to get two or three DEXs and a few bridges. Instead, we want to know all the possible options for transferring token A on chain X to token B on chain Y. That's why we created our Via Router, aggregating more ‘DEXs, bridges, and chains than any other project, to ensure users can find the best routes with the most liquidity and cheapest fees, to swap their tokens across chainsFirst, our ro...
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What are Delta Neutral Strategies?
Funding
Example of Delta Neutral Strategie with DASH using perpetual.
Pseudo-Delta Neutral Strategies with example
Delta neutral strategies are investment strategies used by traders and investors to achieve a delta-neutral position in the market. Let’s find out what this Delta is. In options trading, "Delta" is a Greek letter used to represent the sensitivity of an underlying asset price. Delta measures the rate at which the position cost changes in response to a $1 change in the underlying asset's price. If you've opened a call option at $1000 and simultaneously opened a short on the same asset at the same price, it means you have a delta-neutral position So the term "Delta Neutral" refers to a strategy or position where the overall delta in our case of a portfolio or possibly for a combination of options is close to zero, but this is more suitable for the traditional markets and trades. In other words, a delta-neutral position is designed to have a delta of zero or a very small value, indicating that the position is not significantly impacted by small price movements in the underlying asset. By achieving a Delta-Neutral position, traders aim to minimize or eliminate the exposure to price changes in the underlying asset, allowing them to focus on other factors, such as potentially profit from the Funding.
So, the term "delta neutral" refers to the strategy's objective of neutralizing or minimizing the delta, which is a measure of sensitivity to changes in the underlying asset's price.
Let’s refresh our knowledge about how funding works and why it exists.
Funding is an interest payment based on a percentage of a trader's position size after accounting for leverage. It involves variable payments from long position holders (Bulls) to short position holders (Bears) when funding is positive and vice versa when funding is negative. As you might understand, there should be a balance. That's why Funding exists, and it is only profitable for one side of a trade on the market. To balance the demand between long and short positions, funding rates attract traders to take positions on both sides by funding rate and by mark price. Those people are called Arbitrageurs or Delta Neutral Yield Hunters because they open an exposure not just to short or long the market but to obtain a funding and to make it profitable for them. - Link
Lets say that DASH-USD has a very good news about some updates in his mechanics.
We have a plenty of OI for us to open the position.
Skew is currently 70/30.
Funding is currently around 200% APR for longs.
To earn on this situation and achieve a delta-neutral position, we can follow the steps outlined below:
Selling Tokens on the Perpetual: We decide to sell $10,000 worth of tokens on the DASH-USD perpetual contract. By selling tokens on that perpetual, we take a short position that will earn on the dominance of long positions because of the high funding. This action helps our delta become negative.
Buying Tokens on the Spot Market: Simultaneously, we buy $10,000 worth of DASH tokens on the spot market. This purchase in the spot market helps balance our overall position and increases our exposure to the underlying asset. Since our intention is to be delta neutral, the purchase on the spot market helps offset the short position on the perpetual.
By executing these steps, we effectively create a delta-neutral position in the DASH-USD market. Our position is now designed to be less sensitive to price movements in the underlying asset, allowing us to focus on funding rates to generate profits. So even with high volatility our position will be safe unless there will be some scam pump that will liquidate our short position causing us to open exposure from the other side due to a positive delta.
However, the fact that the token we hold has the highest APR in the market further draws attention to itself. This implies that we are not the only ones on the market. The high APR provides an additional potential source of profit, making our overall strategy more attractive to all Delta Neutral Yield Hunters on the market. Most importantly, these strategies require careful monitoring and periodic adjustments to maintain their neutrality on the market. Market conditions, such as changes in skew that result in changes in funding rates, may require some modifications to the position to ensure its delta neutrality is preserved and is profitable.
Let's review one Twitter post that successfully implemented the same strategy on the OP market.
Fees on Kwenta V2 are low enough that they are paid off very quickly. When V2 started last week, I opened up a small 5X short on the OP token and balanced that by buying OP. That paid over 200% APR for 4 days.
Not that's not very long, but a low-risk 2% yield in 4 days is nothing to ignore. After closing my OP short and selling the OP, I opened a larger 4X short on the AAVE token and bought AAVE spot. This time, I deposited the AAVE token in AAVE and borrowed some sUSD.
I put that sUSD into a Reaper vault for extra yield. This only works for relatively small amounts (maybe $5k or less) because the open interest on Kwenta isn't too high yet and you don't want to move the funding rate with your own position.
The risk here is liquidation if the token moons. With low-leverage that isn't very likely to happen, but I wouldn't start this strategy and go on vacation.
But in this case, we have not only Delta Neutral Position but also a yield using AAVE and Reaper Finance Pools. This can also be done with Tarot, with its uniqueness of separated markets where you can lend your tokens and earn on to markets. For example, you can hedge your position by using USDC-SONNE and USDC-VELO markets.
What is a PDNS?
Pseudo-Delta Neutral Strategies are similar to known as those delta neutral strategies approximation. The trading them trades approach aims to achieve a position closely resembling a delta-neutral position without fully neutralizing it. These strategies are employed when it is challenging or impractical to precisely offset the delta of a position due to various constraints such as limited liquidity, high transaction costs, or market dynamics.
So, in pseudo-delta neutral strategies, traders seek to minimize their exposure to price movements in the underlying asset by adjusting the components of their position. While the position may not have a delta of zero, it is designed to exhibit reduced sensitivity to changes in the underlying asset's price.
In a leveraged farm (Pseudo-Delta Neutral Strategies), liquidity providers aim to achieve USD delta neutrality by relying on borrowed assets at the inception of the trade. However, it is crucial to understand that impermanent loss can disrupt delta neutrality as the spot price deviates from the initial price.
Assuming an initial capital of $80,000 USD for investing in a leveraged ETHUSDC farm, there are typically two approaches to reach a delta neutral farming position at the start, depending on the level of leverage involved.
ETH Long: Going Bullish on ETH
The ETH Long portion involves borrowing USDC with 3x leverage on the ETH-USDC pair. By doing so, a position is established that closely tracks the price movement of ETH. This position exhibits a direct proportional relationship between profit or loss (%) and the price fluctuation of ETH. However, it's essential to note that the leverage factor means that the position will be liquidated if the ETH price drops by approximately -35%.
ETH Short: Betting Against ETH
In the ETH Short portion, traders take a bearish stance on ETH. By borrowing ETH using the USDC-ETH pair with 3x leverage, a short position is created. However, due to the relative size constraints, the short position can only be 1/3 the size of the long position in the ETH Long portion. The profitability of this position also depends on the price movement of ETH, although the relationship is not as linear, especially during significant price drops.
Total Profit/Loss and Risk Assessment
Combining the profits and losses from both portions, the total profit/loss of the multi-position strategy can be determined. Under the assumed conditions, the strategy offers the potential for a profit of up to 4.2% in a 10-day period. Taking into account the annual percentage rate (APR) conversion, including additional income streams such as yield farming and other rewards, the estimated APR stands at around 170%.
To achieve this profit, it is crucial to understand the range within which ETH price movements can be profitable. The ideal price movement range lies between -25% and +35%. Any price movement beyond this range would result in losses for the strategy.
By following this approach, liquidity providers can strive to establish a delta-neutral position at the inception of a leveraged farm. However, it's crucial to consider factors such as impermanent loss, borrowing costs, and the need for ongoing adjustments to the position's delta to maintain delta neutrality.
Since Delta is how much the position changes in response to a $1 change in the token price, if your Delta is 1, that means the same thing as owning 1 token, and if your Delta is 2, that means the same thing as owning 2 tokens, and so on. Since a Delta of 2 would mean you earn $2 for every $1 change in the token price. So it's easier to describe or think about Delta as simply the quantity of assets you're long/short, and indeed that's how Wall Street looks at it.
Going Delta-neutral means you remove the Delta risk from your portfolio, therefore isolating the remaining risks of Theta, Gamma, and Rho.
Theta is how many dollars you gain/lose per 1 day of time. So any interest/funding rate is Theta
Gamma is how much your Delta, or quantity of tokens, changes for a $1 change in token price. That's what is known to cause impermanent loss for an LP position, which have negative Gamma and positive Theta Gamma is always the opposite sign (+/-) as Theta, and they very frequently go hand in hand.
Rho is the only other risk to think about, and it's pretty meaningless in crypto since it's how many dollars you gain/lose per 1.0 change in the U.S. Treasury Bill interest rate, otherwise known as the risk-free rate. So no need to pay attention to that one. It becomes a small factor with options that are around 1 year or more from expiration.
But key is that Delta is the quantity of your token position and Theta is the funding/interest rate. When you neutralize the short Delta from that short perp by buying tokens on the spot market, you isolate your Theta, which is 200% APY, or 10k × 2 = 20k 》20k ÷ 365 = 54.79 daily Theta. Thats how it it works!
More possible strats with DNS’s will be in the next episode
Shout out to α-cen, Treehouse and Abin for helping with the article.
To learn more about Via Protocol, check out:
What are Delta Neutral Strategies?
Funding
Example of Delta Neutral Strategie with DASH using perpetual.
Pseudo-Delta Neutral Strategies with example
Delta neutral strategies are investment strategies used by traders and investors to achieve a delta-neutral position in the market. Let’s find out what this Delta is. In options trading, "Delta" is a Greek letter used to represent the sensitivity of an underlying asset price. Delta measures the rate at which the position cost changes in response to a $1 change in the underlying asset's price. If you've opened a call option at $1000 and simultaneously opened a short on the same asset at the same price, it means you have a delta-neutral position So the term "Delta Neutral" refers to a strategy or position where the overall delta in our case of a portfolio or possibly for a combination of options is close to zero, but this is more suitable for the traditional markets and trades. In other words, a delta-neutral position is designed to have a delta of zero or a very small value, indicating that the position is not significantly impacted by small price movements in the underlying asset. By achieving a Delta-Neutral position, traders aim to minimize or eliminate the exposure to price changes in the underlying asset, allowing them to focus on other factors, such as potentially profit from the Funding.
So, the term "delta neutral" refers to the strategy's objective of neutralizing or minimizing the delta, which is a measure of sensitivity to changes in the underlying asset's price.
Let’s refresh our knowledge about how funding works and why it exists.
Funding is an interest payment based on a percentage of a trader's position size after accounting for leverage. It involves variable payments from long position holders (Bulls) to short position holders (Bears) when funding is positive and vice versa when funding is negative. As you might understand, there should be a balance. That's why Funding exists, and it is only profitable for one side of a trade on the market. To balance the demand between long and short positions, funding rates attract traders to take positions on both sides by funding rate and by mark price. Those people are called Arbitrageurs or Delta Neutral Yield Hunters because they open an exposure not just to short or long the market but to obtain a funding and to make it profitable for them. - Link
Lets say that DASH-USD has a very good news about some updates in his mechanics.
We have a plenty of OI for us to open the position.
Skew is currently 70/30.
Funding is currently around 200% APR for longs.
To earn on this situation and achieve a delta-neutral position, we can follow the steps outlined below:
Selling Tokens on the Perpetual: We decide to sell $10,000 worth of tokens on the DASH-USD perpetual contract. By selling tokens on that perpetual, we take a short position that will earn on the dominance of long positions because of the high funding. This action helps our delta become negative.
Buying Tokens on the Spot Market: Simultaneously, we buy $10,000 worth of DASH tokens on the spot market. This purchase in the spot market helps balance our overall position and increases our exposure to the underlying asset. Since our intention is to be delta neutral, the purchase on the spot market helps offset the short position on the perpetual.
By executing these steps, we effectively create a delta-neutral position in the DASH-USD market. Our position is now designed to be less sensitive to price movements in the underlying asset, allowing us to focus on funding rates to generate profits. So even with high volatility our position will be safe unless there will be some scam pump that will liquidate our short position causing us to open exposure from the other side due to a positive delta.
However, the fact that the token we hold has the highest APR in the market further draws attention to itself. This implies that we are not the only ones on the market. The high APR provides an additional potential source of profit, making our overall strategy more attractive to all Delta Neutral Yield Hunters on the market. Most importantly, these strategies require careful monitoring and periodic adjustments to maintain their neutrality on the market. Market conditions, such as changes in skew that result in changes in funding rates, may require some modifications to the position to ensure its delta neutrality is preserved and is profitable.
Let's review one Twitter post that successfully implemented the same strategy on the OP market.
Fees on Kwenta V2 are low enough that they are paid off very quickly. When V2 started last week, I opened up a small 5X short on the OP token and balanced that by buying OP. That paid over 200% APR for 4 days.
Not that's not very long, but a low-risk 2% yield in 4 days is nothing to ignore. After closing my OP short and selling the OP, I opened a larger 4X short on the AAVE token and bought AAVE spot. This time, I deposited the AAVE token in AAVE and borrowed some sUSD.
I put that sUSD into a Reaper vault for extra yield. This only works for relatively small amounts (maybe $5k or less) because the open interest on Kwenta isn't too high yet and you don't want to move the funding rate with your own position.
The risk here is liquidation if the token moons. With low-leverage that isn't very likely to happen, but I wouldn't start this strategy and go on vacation.
But in this case, we have not only Delta Neutral Position but also a yield using AAVE and Reaper Finance Pools. This can also be done with Tarot, with its uniqueness of separated markets where you can lend your tokens and earn on to markets. For example, you can hedge your position by using USDC-SONNE and USDC-VELO markets.
What is a PDNS?
Pseudo-Delta Neutral Strategies are similar to known as those delta neutral strategies approximation. The trading them trades approach aims to achieve a position closely resembling a delta-neutral position without fully neutralizing it. These strategies are employed when it is challenging or impractical to precisely offset the delta of a position due to various constraints such as limited liquidity, high transaction costs, or market dynamics.
So, in pseudo-delta neutral strategies, traders seek to minimize their exposure to price movements in the underlying asset by adjusting the components of their position. While the position may not have a delta of zero, it is designed to exhibit reduced sensitivity to changes in the underlying asset's price.
In a leveraged farm (Pseudo-Delta Neutral Strategies), liquidity providers aim to achieve USD delta neutrality by relying on borrowed assets at the inception of the trade. However, it is crucial to understand that impermanent loss can disrupt delta neutrality as the spot price deviates from the initial price.
Assuming an initial capital of $80,000 USD for investing in a leveraged ETHUSDC farm, there are typically two approaches to reach a delta neutral farming position at the start, depending on the level of leverage involved.
ETH Long: Going Bullish on ETH
The ETH Long portion involves borrowing USDC with 3x leverage on the ETH-USDC pair. By doing so, a position is established that closely tracks the price movement of ETH. This position exhibits a direct proportional relationship between profit or loss (%) and the price fluctuation of ETH. However, it's essential to note that the leverage factor means that the position will be liquidated if the ETH price drops by approximately -35%.
ETH Short: Betting Against ETH
In the ETH Short portion, traders take a bearish stance on ETH. By borrowing ETH using the USDC-ETH pair with 3x leverage, a short position is created. However, due to the relative size constraints, the short position can only be 1/3 the size of the long position in the ETH Long portion. The profitability of this position also depends on the price movement of ETH, although the relationship is not as linear, especially during significant price drops.
Total Profit/Loss and Risk Assessment
Combining the profits and losses from both portions, the total profit/loss of the multi-position strategy can be determined. Under the assumed conditions, the strategy offers the potential for a profit of up to 4.2% in a 10-day period. Taking into account the annual percentage rate (APR) conversion, including additional income streams such as yield farming and other rewards, the estimated APR stands at around 170%.
To achieve this profit, it is crucial to understand the range within which ETH price movements can be profitable. The ideal price movement range lies between -25% and +35%. Any price movement beyond this range would result in losses for the strategy.
By following this approach, liquidity providers can strive to establish a delta-neutral position at the inception of a leveraged farm. However, it's crucial to consider factors such as impermanent loss, borrowing costs, and the need for ongoing adjustments to the position's delta to maintain delta neutrality.
Since Delta is how much the position changes in response to a $1 change in the token price, if your Delta is 1, that means the same thing as owning 1 token, and if your Delta is 2, that means the same thing as owning 2 tokens, and so on. Since a Delta of 2 would mean you earn $2 for every $1 change in the token price. So it's easier to describe or think about Delta as simply the quantity of assets you're long/short, and indeed that's how Wall Street looks at it.
Going Delta-neutral means you remove the Delta risk from your portfolio, therefore isolating the remaining risks of Theta, Gamma, and Rho.
Theta is how many dollars you gain/lose per 1 day of time. So any interest/funding rate is Theta
Gamma is how much your Delta, or quantity of tokens, changes for a $1 change in token price. That's what is known to cause impermanent loss for an LP position, which have negative Gamma and positive Theta Gamma is always the opposite sign (+/-) as Theta, and they very frequently go hand in hand.
Rho is the only other risk to think about, and it's pretty meaningless in crypto since it's how many dollars you gain/lose per 1.0 change in the U.S. Treasury Bill interest rate, otherwise known as the risk-free rate. So no need to pay attention to that one. It becomes a small factor with options that are around 1 year or more from expiration.
But key is that Delta is the quantity of your token position and Theta is the funding/interest rate. When you neutralize the short Delta from that short perp by buying tokens on the spot market, you isolate your Theta, which is 200% APY, or 10k × 2 = 20k 》20k ÷ 365 = 54.79 daily Theta. Thats how it it works!
More possible strats with DNS’s will be in the next episode
Shout out to α-cen, Treehouse and Abin for helping with the article.
To learn more about Via Protocol, check out:
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