Advanced Delta Neutral Strategies_Bohan Li

advanced delta neutral strategies um i'm beau and so who am i so i have a background in computer science computational finance from carnegie mellon and after graduating i've been working at a couple early stage database startups doing development in c c plus plus i actually started d5 relatively recently compared to some others here and i started back in march initially i was kind of looking for a place to hold a down payment on a house because you know stocks are a little risky and this one so what that means is i was kind of focusing on short-term low-cost stable coin-based strategies and that's when i stumbled on this concept of delta neutral so what is delta neutral it means that essentially you're just taking a long and short position on acid simultaneously and what this allows you to do is kind of take advantage of some of these asymmetric rates across different protocols so what i mean by that is some examples the perpetual trading platforms they rely on funding rates to kind of keep assets at peg and you can kind of find arbitrages across them another thing is just simple interest rate arbitrage across different money markets so you have stuff like ave compound and sometimes they have different rates and you can take advantage of it another one is a little bit more complicated where you are borrowing and selling covered calls on certain assets essentially it's kind of taking like a naked call selling position but if you have um limit by hedges at the strike prices you'll be you'll be okay but the one i'm going to be focusing on today is about borrowing and yield farming on decentralized exchanges so all right so let me introduce delta neutral leveraged yield farming so first thing is you want to pick a pair of tokens that have good farm rewards relative to the amount of borrow rate it has the second thing is you deposit stable coin as collateral on a lending protocol and borrow one or both tokens then you take the tokens you put it on a leveraged yield farming platform and what that allows you to do is you can kind of deposit tokens form an lp borrow more and then add that to your lp position because your your liquidity position is collateral for um for this leveraged yield farming platform so and another thing is as you as you accumulate farming awards from trading fees and um just token admissions you you'll probably want to be adjusting your positions um okay so how much are you actually making from this strategy so first you get the supply apr on your deposited stable coin which is nice the main the meat of the returns come from your liquidity pool trading fees and farming awards and as for the negatives of course there's the bar apr and the lending platforms there's also going to be borrow aprs on the leverage yield farming platforms and finally the big one which is in permanent loss so assuming you're maintaining a 70 bar ratio and doing 3x leveraged yield farming um this is kind of the equation that you'll be uh thinking about so let's take an example so let's say you were to do this strategy on bitcoin and avalanche so let's start so i'm going to be using trader joe as my lending platform for those that don't know it's kind of it's a nice like mix of it's called like a it kind of captures a lot of components of d5 together so i like it uh and it also also gives you additional emissions for um depositing which is always a plus and then you take 70 percent so that's 70 of avax um the the borrow rate for avax is 8.34 and then we'll be using alpha hamura for the leveraged yield farming platform so in order to kind of take up with 3x leverage we'll need so we if we have a 70 dollars to start with we'll need 210 dollars to end which means that because liquidity polls have 50 50 ratios we'll need 105 worth of avax which we'll borrow from the um yield farming platform and we'll pair with the remaining 105 dollars in bitcoin and finally so we have 210 dollars of total liquidity pool tv total liquidity pool value and that's going to earn nine percent in trading fees and around nine percent in trader joe emissions so if you think about it what what will happen kind of your yearly net position how it's going to change is you're going to end up getting a lot of trader joe tokens um a little bit more bitcoin and you're actually going to be a little bit net negative avax because the borrow rates of avax are so much higher than bitcoin and so assuming no permanent loss everything goes right this back the envelope calculation is like 30 30.5 so but we need to be a little bit more kind of diligent with how we calculate returns so i kind of took um took that formula took took this position and modeled it in python and so you can see yeah it's not too not too long it's a relatively simple position so okay so here's where we kind of run our model back test starting from the beginning of the year so total earnings so the difference between selling and auto compounding rewards is all those trader joe emissions if you were to kind of sell it for cash and re-add that to your um delta neutral position you end up getting 2.4 percent and if you kind of just held your joe tokens or not uh you or sorry you don't hold your joe tokens you kind of sell them for ptca vacs you'll end up with two percent and annualizing it you'll end up around 30 if you were to kind of sell emissions for cash and 25 if you were to kind of sell missions back into ptec avax and here's uh here's a useful chart for kind of tracking the position over time we take into account what it takes to sell the rewards what happens if you're compounding and the effect of a permanent loss has on your position so you can kind of see there are there are parts where in permanent law starts to outweigh your rewards but um in general bitcoin avax they kind of move together so permanent loss is going to drop eventually okay and um here's here's the actual returns if you were to implement this strategy starting beginning of the year so if you were to on the green line here is what would happen if you actually just bought btc avax and held it so you can kind of remember that kind of in a bear market now so you would have been pretty negative but the delta neutral position um it kind of it's first is much less volatile and also you see it's kind of steadily accumulating rewards okay so let's say so 30 returns it's good but you can do a little bit better um so what this what what you can do here is you can adjust the short side so instead of being 50 50 short each token you um you're sure a little bit yeah you're sure more one side than the other and what this lets you do is you can kind of take these inflationary farm tokens that you see on different liquidity pools and actually short them with respect to a more stable asset so this lets you kind of offset high and permanent loss or you can kind of you know short the token and kind of rebalance that position by just collecting farm rewards so it makes it a little bit simpler but as you can imagine there's going to be some difficulties with this strategy because you're going to need to find people willing to lend you these tokens which means they're going to take long positions on that and you're not going to find too many people that take long positions on farm tokens all right but here's an example that i tried that actually worked out so so if you don't know orca is a kind of a uni-swap style for or more like sushi swap because they offer farming emissions but it's it's it's a pretty big decentralized exchange on solana and so you could expect if you pair with a salon token they generally move together so i'm going to start a little bit earlier this time so back in last year of november of last year so this borrow ratio what it means is i'm going to be borrowing 25 percent more um orca than solana which means that in order to form the 50 50 pair i'll need to sell orgo for solana meaning that i'm net short orca and as you can imagine the borrow rates look like this um orca you have a lot of a lot less demand on the supply side which makes the borrow rates pretty high but it offsets by the super high emissions that you get in orca and okay so annualizing these earnings you actually end up close to 126 percent um and now this is a lot more volatile position um so let me show you the charts okay so again you see something similar where back you know back in uh earlier this year there was a lot of just volatility in general um actually this one is especially volatile because orca got listed on coinbase so there was this one day where or a couple weeks where orc is pumped by a lot so that's stuff to watch out for when you're doing this kind of more risky position but um but you can see in the end you know the math doesn't lie the rewards will just keep on accumulating and eventually you'll be fine um so here's here's what it takes here's what it would look like actual net position value so yeah you'll see this especially with the selling rewards um kind of accumulating the compound method of like accumulating the pair so solana orca is not very good because you can see the price of solana orca ratio solana is actually or orca orca is dropping a lot with respect to solana so before you would need 15 so in the beginning you need around 15 orca to swap for a single solana all the way up to around 40 these days or 30 40 at the peak okay and here's an interesting kind of picture of what it would look like if you use different barrier rates so the one we were talking about was the yellow one which is 25 percent solana 75 orca you can always go back to the 50. it's the green line in the middle kind of the most stable of them or you know if you're really crazy you can kind of short solana and go super long orca and yeah you can see that doesn't do that's not that doesn't work very well for you um but it did it did work very well in the beginning you know um back when orca was pumping a little bit so all right oh i guess i guess a cool thing here is that um if you want you can kind of switch between positions so you can kind of adjust your borrow your borrowing long on the fly so to kind of like capture all this movement but that's more taking like a trading view on things so all right so closing some closing thoughts number one you have to watch your limits so remember you're you have two kind of short positions here you have your borrowed position on your money market and you also have this uh leveraged position on your on your yield farm and both of these there's going to be different kind of risks the borrowed position has token price pumps risk when because your collateral stable coin which doesn't move and if the thing you're borrowing goes up your ratio is going to get screwed up whereas for the leverage yield farming your your collateral is the lp pair which gets um screwed by a permanent loss so be careful with that another thing you have to watch out for is borrow rates and farming yield so this is kind of this type of strategy as more people do it it kind of makes it worse for everybody else so um you got to see what people are doing and um it's important to as you as things change you know rates increase decrease you want to be able to rotate as as you see fit which means that you kind of want to use low gas cost chains which is why i gave examples in avalanche and solana so yeah in the end this is not really 100 passive income because there are some strategy monitoring but you can get pretty close if you're just safe about what tokens you pick and what the borrow and what tokens you borrow basically so cool so if you're interested in learning more um i will be offering private lessons and this is where i can kind of help help you based on your personal goals risk tolerance how much money you have to start and we'll be over we can go over a few other delta neutral strategies my favorite being that call thing i talked about earlier and we'll go a little bit more advanced in the quantitative analysis of these positions where we're actually going to be doing simulations trying to estimate based on like previous volatility what the future price ratios and your yields will be and here's my twitter discord telegram and anybody have any questions please wait for the mic i'll bring it to you so we can pick it up on the stream