Pseudo-Delta Neutral Strategy

As we all know, the main purpose of Leveraged Yield Farming is to improve capital efficiency. In the pursuit of leveraged yields, we can choose to open long or short farming positions according to our view on the market. However, one often overlooks the risk of liquidation. With the volatile crypto market, a more neutral and lower-risk method of farming is needed.

In the process of exploring farming strategies tailored to weather the volatility in the market, the crypto community has explored the idea of hedging from traditional finance, in farming. One instance is the Pseudo-Delta Neutral Strategy.

What is Delta-Neutral Hedging Strategy?

Delta is the differentials in the price of the assets in your portfolio. When we say ‘Delta-neutral’, we are expecting the overall delta of your assets to total zero. Naturally, you might ask: “Since I can’t lose money, I won’t gain either, right?”… While that might be true in CeFi, you can still earn profits from neutral positions when you farm on DeFi because you’re providing liquidity and will be rewarded with the yields.

Delta-Neutral Hedging Strategy takes a long and short position in an asset simultaneously to minimize the effect on your portfolio when the underlying asset’s price moves. With this Delta-neutral strategy, you can expect higher capital utilization rate and profit.

Position Explanation of 3x PDN strategy: Given 400 USDC you deposit, then: 100 USDC in 3X APT/USDC (borrow USDC). 150 USDC cost APT LONG exposure 300 USDC in 3X APT/USDC (borrow APT). 150 USDC cost APT SHORT exposure

When creating a PDN position, the initial position does not have any long/short exposure, but as the price changes, the volatile assets in the position and the borrowed volatile assets are inconsistent, resulting in corresponding long/short exposure. If the price goes up or down further, this part of the risk exposure will increase and cause losses.