Delta-Neutral Examples

Context

Inspired by market strategies used by institutional traders, we illustrate the concept of delta-neutral strategies using an inverse perpetual contract for Bitcoin (BTC). SeaBlocks utilizes both inverse and linear perpetual contracts to maintain delta neutrality. Below, we explain different payoff scenarios using inverse perpetual contracts, which have more complex payout structures.

An inverse BTC perpetual contract, which represents $1 of BTC paid out in BTC, follows this formula:

$1 / BTC Price in USD

If BTC is worth $1, then the BTC value of the perpetual is 1 BTC, $1 / $1.

If BTC is worth $0.5, then the BTC value of the perpetual is 2 BTC, $1 / $0.5.

If BTC is worth $2, then the BTC value of the perpetual is 0.5 BTC, $1 / $2.

Worked Examples

To create the synthetic USD investing, Seablocks needs to allocate 1 BTC as margin on a derivatives exchange and short 1 BTCUSD perpetual contract.

Rapid BTC Price Decrease

If BTC’s price drops from $1 to $0.1:

• The value of BTCUSD in BTC = $1 / $0.1 = 10 BTC

• The P&L of the BTCUSD position = 10 BTC (current value) - 1 BTC (initial value) = +9 BTC

• SeaBlocks initially allocated 1 BTC as margin with the exchange.

• The total equity balance is now 10 BTC.

• With BTC now at $0.1, the portfolio’s USD value remains unchanged at $1 ($0.1 * 10 BTC).

Rapid BTC Price Increase

If BTC’s price rises from $1 to $100:

• The value of BTCUSD in BTC = $1 / $100 = 0.01 BTC

• The P&L of the BTCUSD position = 0.01 BTC (current value) - 1 BTC (initial value) = -0.99 BTC

• SeaBlocks’ total equity balance is 1 BTC (initial margin) - 0.99 BTC (loss), resulting in a final balance of 0.01 BTC.

• With BTC now at $100, the portfolio’s USD value remains unchanged at $1 ($100 * 0.01 BTC).

Delta-neutral strategies ensure that the portfolio’s USD value remains stable despite fluctuations in the underlying asset’s price. However, in certain market conditions, deviations may occur, as described in the Risks section.