Up till now we used a strategy that is both delta neutral and gamma neutral, where we leverage stable pools, by borrowing the same asset.
Since these strategies got saturated during the last weeks, yields declined and we worked on a new type of delta neutral strategy with higher returns.
In this article we introduce the new strategy: The Pseudo delta neutral strategy!!!
This strategy uses a 2x leveraged volatile pool, a big difference however is that this strategy is not Gamma neutral. Practically this means that the strategy has to be rebalanced more often, and that very big market moves still have an impact on the portfolio value.
At the end of this short article we will discuss in depth how both the old and new delta neutral strategy work, but first wel will give a short refresher what Delta, Gamma and Delta Neutral Portfolio’s actually mean.
The Greeks are variables that are used to asses risks of financial instruments/portfolio’s.
Each greek variable expresses how the value of the financial instrument/portfolio is influenced by a small change of a certain underlying parameter. It is a measure how sensitive a portfolio is to said underlying parameter.
The value of a Greek is not static but changes over time, or with big market movements. Investors aiming to keep a certain Greek value of their portfolio fixed need to periodically rebalance their portfolio.
Delta expresses the rate of change between a financial instrument/portfolio and an underlying asset price.
If a portfolio has a positive delta of +0.2 with the price of Ethereum, then when the Ethereum price increases with 1%, the value of the portfolio will increase with 0.2%.
Mathematically, the Delta ($\Delta$) can be expressed as the first-order partial derivative of the portfolio value ($V$) with respect to the price of an underlying asset ($S$).
$$ \Delta = \frac{\partial V}{\partial S} $$
Gamma expresses the rate of change between the Delta of a financial instrument/portfolio and the underlying asset price.
Gamma measures how sensitive delta itself is to changes in the price of the underlying asset. It gives a measure how hard a portfolio will be influenced by big market movements, or how often a portfolio has to be rebalanced to keep it’s delta fixed.
Mathematically, Gamma ($\Gamma$) can be expressed as the first-order partial derivative of the Delta value with respect to the price of an underlying asset ($S$), hence it equals to the second-order partial derivative of the portfolio value.
$$ \Gamma = \frac{\partial \Delta}{\partial S} = \frac{\partial^2 V}{\partial S^2} $$