Delta-Neutrality
A delta-neutral position is a strategy in which the overall directional risk of a portfolio or position is minimized or eliminated.
Last updated
A delta-neutral position is a strategy in which the overall directional risk of a portfolio or position is minimized or eliminated.
Last updated
Delta, as in the Greek letter δ, is one of the most fundamental concepts in trading and investing. It measures the sensitivity of the portfolio's value to changes in the price of the underlying asset. For example, if a portfolio contains a single underlying asset and has a delta of 0.5, for every $1 increase in the price of the underlying asset, the price of the portfolio is expected to increase by $0.50. In the case of USS and eUSS, the underlying asset is Solana token.
In a delta-neutral position, the portfolio's delta is brought close to zero. This means the underlying assets of our stablecoins do not change value regardless of how SOL price moves.
This is achieved by simultaneously buying or holding a certain quantity of a financial instrument and selling or shorting another instrument in such a way that the changes in value of the two positions offset each other. In the case of USS or eUSS, the stablecoin protocol holds staked spot SOL tokens (jitoSOL) while shorting the same number of spot tokens (directly shorting SOL tokens) or SOL-USD perpetual contracts respectively.
For example, when you mint $100 worth of USS or eUSS, the stablecoin protocol immediately buys $100 worth of jitoSOL while shorting $100 worth of spot SOL (USS) or SOL-USD perpetual contracts (eUSS) using the $100 jitoSOL we bought as collateral. For illustraive purpose, let's assume 1 jitoSOL is worth $100 and 1 SOL is worth $100:
0
1 jitoSOL = $100
1 SOL = $100
or $100 SOL perpetual contract
$100
When we short $100 worth of SOL, we receive $100 in proceed into our account. When we close this short position, we will have to buy and return 1 SOL.
Let's assume in period 1, SOL's price drops to $80. Our long position of 1 jitoSOL is only worth $80 now. But our short position generates a profit of $20. This is because if we are to close the short position immediately, we will need to use the $100 proceed to purchase back 1 SOL at $80, leaving us with a $20 difference as profit. Thus, Profit and Loss (P&L) of a short position equals to initial price minus the current price.
1
1 jitoSOL = $80
P&L: $100 - $80 = +$20
$80 + $20 = $100
As demonstrated, although the price of SOL changes, the total portfolio value stays the same at $100. Similarly, when SOL's price goes up to $120:
1
1 jitoSOL = $120
P&L: $100 - $120 = -$20
$120 - $20 = $100
For more information how we deploy the position in practice, please look at and l sections.