Delta-Neutral Trading Strategies: Risks and Benefits

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A delta-neutral strategy is a nuanced trading approach allowing for the hedging of open trades with opposing ones, enabling profit regardless of each trade's outcome.
Previously, we covered the foundational features of delta-neutral strategies. Today, we will explore how to employ this tactic for personal gain and highlight the primary risks encountered in this journey.

Earnings through Funding

Among the foremost delta-neutral strategies is capitalizing on funding rates. The funding rate is a pivotal factor in the derivatives segment of exchanges, aimed at balancing the disparity between open long and short positions.

Imagine a scenario where the BTC chart experiences a drastic downturn, prompting a majority of traders to seek short positions. This situation leads to a disproportionate volume of short positions in futures compared to long contracts. In such instances, the funding rate turns negative, and for a specified duration (typically every hour or eight hours), traders holding short positions are required to pay a portion of their position to those holding long positions, and the reverse applies when the funding rate is positive.

Earning from the funding rate involves:

  • Purchasing cryptocurrency on the spot market;
  • Simultaneously opening a short position of identical volume and comparable price on futures for the same asset.

On a stable market (where price fluctuations are minimal), the average funding rate stands at 0.01% per hour. However, in times of heightened volatility, this rate can significantly deviate. For instance, from February 28 to March 6, on the WhiteBIT exchange, the funding rate occasionally surpassed 0.09%, with an average of 0.05% every 8 hours. Consequently, traders with short positions could secure a daily return of 1.5% over eight days, cumulating to a 45% return monthly. 
Funding Rate History for the BTC/USDT PERP Trading Pair. Source:

Funding Rate History for the BTC/USDT PERP Trading Pair. Source:

This profit is added every 8 hours to the total balance of the user's derivative trades. The most substantial earnings from the funding rate are typically seen in a bullish market, yet the risk of liquidation should not be overlooked if the price of the asset surges excessively. 

To mitigate the risk associated with an open position, maintaining a constant limit order for sale is advisable. This strategy ensures that, in the event of a futures position liquidation, the trader approximately secures an equivalent volume of profit and loss. 

Token Staking for Retroactive Airdrops

A user acquires a certain volume of cryptocurrency while also initiating a short trade. The purchased assets are placed in staking, potentially yielding retroactive airdrops in the future. 

During the February-March period, numerous assets announced rewards for stakers, including ATOM, TIA, PYTH, JUP, DYM, ALT, DOT, OSMO, and others. With derivatives for these tokens available across various exchanges, crafting a delta-neutral strategy is feasible. Nonetheless, this method entails a higher risk compared to previously mentioned techniques because users are unable to sell their assets in the event of liquidation. 

Therefore, it's crucial to either set the liquidation price exceptionally high or have additional funds ready to augment the volume of the short position as needed.

Participation in Token Sales on Launchpads

Certain crypto launchpads, such as DaoMaker and Polkastarter, offer token sale participation exclusively to holders of the project's native coin (DAO and POLS, respectively). While IDOs can be profitable in a bull market, it's important to remember that the value of purchased tokens may decline. 

To hedge against this risk, traders employ a delta-neutral strategy: staking the necessary tokens for launchpad participation while simultaneously opening a corresponding short futures position on the same asset. This strategy bears a risk similar to staking, as it might not always be possible to swiftly sell the tokens, necessitating precise and cautious calculation of the liquidation price.

Derivative Trading for Retroactive Airdrops

Cryptocurrency platforms such as Aevo, Drift, KiloEx, Hyperliquid, and several others have announced retroactive airdrops for users who maintain substantial trading volumes on these exchanges. This type of trading isn't for everyone due to the risks linked to high leverage usage. 

However, employing a delta-neutral strategy can help mitigate these risks. For instance, a trader could open both a long and a short position on the same asset with identical volumes across two different accounts. 

Unlike earning through funding rates, this method involves opening both positions in the futures market. Consequently, profits from one position can counterbalance losses from the other, maintaining the overall delta close to neutral. 

This setup allows the user to manage multiple accounts, which the project may consider for a retroactive airdrop based on activity. At the same time, the only costs involved are fees and a spread that varies with the trading pair.

Risks Associated with Delta-Neutral Strategies

Although we've already highlighted a few risks related to delta-neutral strategies, it's important to note that these aren't the only potential pitfalls. Broadly speaking, factors that can lead to financial loss when using delta-neutral trading techniques include:

  • The risk of liquidation for the user's position;
  • The complexity of mathematical calculations. If positions are opened with unequal volumes or at different prices, the delta of such a position could become negative;
  • The risk of scams or breaches in the trading protocols used;
  • High transaction fees within certain networks, which could render the costs higher than the potential profits;
  • The possibility of your account being disqualified from receiving an airdrop, resulting in the loss of money you've invested in platform activities.  

It's crucial to remember that the profitability of most delta-neutral strategies (such as coin staking, token sales, and retroactive airdrops) is possible but not guaranteed. 

Final Thoughts

Delta-neutral strategies offer a fascinating way to earn within the cryptocurrency realm, demanding various skills and expertise. These strategies can also be applied in betting platforms (for arbitrage betting), on cryptocurrency options exchanges, and more. A crucial requirement for users opting for these methods in the cryptocurrency market is making informed platform choices and performing accurate mathematical calculations.