Delta Neutral

Delta neutral portfolios are optimized for loss-prevention. A delta neutral portfolio is not affected by price changes of individual assets. Because DeltaPrime is fully cross-margin, you can decide for yourself which asset you want to be delta neutral on. A portfolio that is delta neutral on BTC will always appreciate in BTC value, whereas a portfolio that is delta neutral on USDC will always appreciate in USDC value.

The delta neutral portfolio is perfect for investors who:

• Are in it for the long-term

• Want to profit whether there is a bull- crab- or bear market

• Mainly want to benefit from arbitrage opportunities within DeltaPrime

Example strategy: AVAX

In this strategy we are arbitraging the AVAX interest rates to remain delta neutral on USDC. In order to be delta neutral, the borrowed assets should not be swapped into a different asset (unless pegged); the asset you are delta neutral on should remain in the same (or pegged) asset as well. That means we:

• Deposit USDC in our Prime Account

• Borrow AVAX against that

• Stake AVAX in Yield Yak / Vector farm

By depositing USDC, borrowing AVAX, and not swapping any assets for unpegged assets, we are free from price exposure: Any price deviation of the borrowed asset is covered one-to-one by the (farmed) assets in the portfolio. Simultaneously, the collateral is generating revenue too, leading to a base return equal to the return on the integrated platform itself.

Expected returns

If you deposit $1000 USDC as collateral which can be farmed at 5%, and borrow 4x AVAX with a 7% interest rate, farming it with a 10% farming interest rate, your APY =

\text{APY} = {0.05(1000)+(0.10-0.07)*(4000)\over1000} *100 \text{% = 17%}

Because you have hedged your position, as long as you prevent liquidation and your farming APY is higher than the interest rate, you will end up with a profit. In this setting, worst-case AVAX drops 100% (or 99.99% for sake of math), leaving you with:

\text{APY} = {0.05(1000)+(0.10-0.07)*(4000 * 0.0001)\over1000} *100 \text{% = 5%}

Which is low, but not negative, meaning that with AVAX depreciating worst case you earn your stable's yield.

Of course, if AVAX appreciates in price, your APY increases. If AVAX immediately appreciates 100%, your APY becomes:

\text{APY} = {0.05(1000)+(0.10-0.07)*(4000 * 2)\over1000} *100 \text{% = 29%}

Since you borrowed AVAX, even though your position becomes more profitable, your health meter will go down. This means you will either have to repay part of your borrowed funds, or add extra collateral to prevent liquidation.

The Health Meter

The health meter is a representation of your collateralization ratio. In this strategy, the collateralization ratio can change with price movements. As you hold the main part of your portfolio in borrowed funds, the ratio changes tend not to be big. An example:

You deposit $1000 USDC and borrow $4000 AVAX. Your collateralization ratio is (1000/4000=) 25%. If AVAX halves in price, your collateral is still $1000, yet the value of borrowed funds decreased to $2000. Even though, after repaying borrowed assets, you can withdraw the exact same value as before ($1000), your collateralization ratio just went up (1000/2000=) 50%.

If AVAX increases in price, the opposite happens: your collateralization ratio (and with that your health) drops, even if you don't make a loss on your portfolio.

What to check?

• After depositing, you only swap these assets for pegged assets (if at all)

• After borrowing, you only swap these assets for pegged assets (if at all)

• Borrowing APY is lower than farming APY

• There is some health left for short-term pegged price deviations

Important note

1. While the underlying values don't change, you can still get partially liquidated. If this happens a bonus up to 10% will be paid as a liquidation bonus from your Prime Account's collateral.

2. This strategy assumes your farming interest stays higher than the borrowing interest. Because of the relative low risk, you might have to check regularly your Account APR to make sure your portfolio stays profitable.