Detailed Instructions

Delta-neutral refers to a portfolio position where the overall sensitivity to the price movements of the underlying asset is zero. For an LP position, this means structuring your liquidity so that gains or losses from the price change of one asset are offset by the other. The goal is to profit from trading fees while minimizing impermanent loss.

• Select a volatile asset and a stable asset pair: Common choices are ETH/USDC or WBTC/DAI. The volatile asset provides the exposure to hedge, while the stablecoin acts as the hedge anchor.
• Calculate the initial delta: Before providing liquidity, your portfolio's delta is simply the number of volatile tokens you hold. For example, if you deposit 1 ETH and 2000 USDC into a pool, your initial delta is +1 (long 1 ETH).
• Determine your target hedge ratio: A fully delta-neutral position requires a hedge ratio of 0. This is achieved by taking an offsetting short position, typically via perpetual futures or options.

Tip: Use a concentrated liquidity AMM like Uniswap V3 for more capital efficiency, allowing you to define a specific price range for your LP position.

Detailed Instructions

Deploy your capital into the chosen Automated Market Maker (AMM). For a precise strategy, using concentrated liquidity is highly recommended.

• Choose your price range: Select upper and lower bounds where you will provide liquidity. For a delta-neutral strategy, this range should be symmetric around the current price. Example: If ETH is $2000, you might choose a range from $1500 to $2500.
• Deposit liquidity: Interact with the pool's smart contract. For Uniswap V3 on Ethereum mainnet, you would call the NonfungiblePositionManager contract at address 0xC36442b4a4522E871399CD717aBDD847Ab11FE88.
• Mint your LP NFT: The deposit will mint an NFT representing your position. Store the token ID securely.

solidityCopy
// Example interaction via ethers.js to mint a position
const tx = await nonfungiblePositionManager.mint({
  token0: USDC_ADDRESS,
  token1: WETH_ADDRESS,
  fee: 3000, // 0.3% fee tier
  tickLower: calculateTick(1500),
  tickUpper: calculateTick(2500),
  amount0Desired: 2000000, // 2000 USDC
  amount1Desired: 1000000000000000000, // 1 ETH
  recipient: YOUR_ADDRESS,
  deadline: Math.floor(Date.now() / 1000) + 3600
});

Tip: The initial deposit will create an imbalanced position based on the current price, which establishes your initial delta that needs to be hedged.

Detailed Instructions

Your LP position has inherent delta exposure. As the price of ETH changes, the proportion of ETH vs. USDC in your LP changes. You must calculate this delta and take an opposing position.

• Calculate LP Delta: Use the formula or a calculator to find your position's delta. For a Uniswap V3 position, delta (Δ) can be approximated as: Δ = (L / √P) * (1 - √(P_lower / P)), where L is liquidity, P is current price, and P_lower is your range's lower bound.
• Open a short perpetual futures position: To offset a +1 ETH delta from your LP, you need a -1 ETH delta from a short. Open a short position on a platform like dYdX (v3 contract: 0x1e0447b19bb6ecfdae1e4ae1694b0c3659614e4e) or GMX.
• Determine hedge size: If your LP delta calculates to +0.85 ETH, you would open a short perpetual swap position for 0.85 ETH worth of notional value.

javascriptCopy
// Pseudo-code for calculating required hedge notional
const lpDelta = liquidity * (1 / Math.sqrt(currentPrice) - 1 / Math.sqrt(upperTickPrice));
const hedgeNotional = lpDelta * currentPrice; // Value in USD to short
// Command to open short on dYdX (conceptual)
// dydx-perpetual short ETH-USD --size 0.85 --leverage 5

Tip: Use a delta calculator dashboard or subgraph query to monitor your LP's delta in real-time, as it changes with every price movement.

Detailed Instructions

A delta-neutral position is not set-and-forget. Portfolio delta will drift due to price changes, accrued fees, and gamma (the rate of change of delta). Failure to rebalance leads to unwanted directional exposure.

• Set up monitoring alerts: Use tools like DefiLab, Zapper, or a custom script to track your combined delta (LP delta + hedge delta). Aim to keep the net delta within a tight band, e.g., ±0.05 ETH.
• Perform delta rebalancing: When the net delta exceeds your threshold, adjust your hedge.
  • If net delta is positive (too long), increase your short perpetual position.
  • If net delta is negative (too short), decrease your short position.
• Account for accrued fees: Earned fees are added to your LP position, altering its composition and delta. Periodically harvest fees and recalculate your hedge.
• Manage the liquidity range: If the price moves close to or beyond your LP's bounds, you may need to re-center your position to remain active and efficient.

Tip: Automate rebalancing using a keeper network (e.g., Gelato Network or Chainlink Keepers) or a smart contract to execute hedge adjustments when conditions are met, minimizing manual intervention and slippage.

Detailed Instructions

Begin by analyzing your active liquidity pool position to understand your price risk exposure. Calculate the impermanent loss (IL) potential based on the current price ratio of the paired assets (e.g., ETH/USDC) and your chosen price range. Use an IL calculator or the formula IL = 2 * sqrt(price_ratio) / (1 + price_ratio) - 1. Determine the hedge notional value, which should correspond to the value of your more volatile asset (e.g., ETH) in the pool.

• Sub-step 1: Query Position Data: Use a subgraph or the pool's contract to get your deposited amounts, price range, and current pool price. For a Uniswap V3 position, call positions(tokenId) on the NonfungiblePositionManager contract.
• Sub-step 2: Calculate Delta: Estimate your position's delta, or price sensitivity. A simple proxy is the value of the volatile asset in your position. If you have 1 ETH and 3000 USDC at a 1:3000 ratio, your delta is roughly +1 ETH.
• Sub-step 3: Set Hedge Goals: Decide on the hedge duration (e.g., 30 days) and the maximum acceptable IL. This defines the strike prices and expiry for your options.

Tip: For concentrated liquidity positions, the delta changes as the price moves in and out of your range. Consider hedging the worst-case delta at the edge of your range.

Detailed Instructions

The core strategy is to buy out-of-the-money (OTM) put options on the volatile asset you hold (e.g., ETH) to protect against downside moves, or OTM call options on the asset you are paired against to protect against upside moves (if your volatile asset depreciates). This creates a protective collar. Size the option position so its delta neutralizes your LP position's delta. For a +1 ETH delta, you might buy put options on 1 ETH.

• Sub-step 1: Choose Option Parameters: Select a strike price 10-20% away from the current price (e.g., ETH at $3200, choose a $2900 put). Choose an expiry matching your hedge duration.
• Sub-step 2: Source Liquidity: Use a decentralized options protocol like Lyra, Dopex, or Premia. Identify the specific market (e.g., sETH-30JUN2024-2900-P).
• Sub-step 3: Calculate Premium & Size: The premium cost is your hedge expense. Use the protocol's quoting function. For example, on Premia, you might call quoteOption(2900e18, 1e18, false, 1656633600) to price a 1 ETH put.

Tip: Selling a far OTM option on the opposite side (e.g., a call) can generate premium to offset the cost of the protective put, creating a cost-neutral collar.

Detailed Instructions

Execute the trade on your chosen options platform. This will involve approving the token (e.g., USDC for premium) and calling the purchase function. After execution, your LP position is now delta-hedged, but the hedge's effectiveness changes with price and time (gamma and theta). You must monitor the net delta of your combined LP+Options position.

• Sub-step 1: Execute Trade: On Lyra, you would call openPosition() on the OptionMarket contract with parameters like listingId, amount, premium, and referrer.
• Sub-step 2: Record Position Details: Save the option token ID and position key for future management. For example, a Dopex option position might have a key like 0x123...abc.
• Sub-step 3: Set Up Monitoring: Use a dashboard or script to track the mark-to-market value of both positions. Calculate the net delta daily. If the price moves significantly, the option's delta will change, requiring rebalancing.

codeCopy
// Pseudo-code to fetch net delta
lpDelta = getLPDelta(positionId);
optionDelta = getOptionDelta(optionTokenId); // Negative for a long put
netDelta = lpDelta + optionDelta; // Target ~0

Tip: Use a service like DefiLlama or a custom subgraph to aggregate your position data across LP and options protocols.

Detailed Instructions

Dynamic hedging is required to maintain effectiveness. If the price moves and your net delta drifts from zero, you must rebalance. This can involve adjusting your LP position (rare), or more commonly, rolling your options to a new strike/expiry. As options approach expiry, decide to let them expire worthless if OTM, exercise if ITM, or roll them forward to maintain protection.

• Sub-step 1: Rebalance Delta: If net delta is +0.5 ETH, you are under-hedged. You could buy more put options or sell a small amount of the volatile asset from your LP position.
• Sub-step 2: Roll Options: To roll a position, simultaneously close the near-expiry option and open a new one. On Premia, this might involve two transactions: closePosition(optionTokenId) and a new openPosition.
• Sub-step 3: Close Hedge at LP Exit: When you withdraw your liquidity, calculate your final IL and option P&L. Close the option position if it still has time value. For example, call closePosition with the specific optionTokenId and receive the remaining collateral/premium.

Tip: Automate delta monitoring with an alert system (e.g., using Gelato Network) to trigger rebalancing transactions when your net delta exceeds a threshold like ±0.2 ETH.