Strategy (Pseudo Delta Neutral)
Pseudo-Delta-Neutral (PDN) Liquidity Provisioning is a strategy that enables users to provide liquidity without taking initial directional price exposure to a specific token. The goal is to earn yield from liquidity provision while minimizing exposure to asset price movements.
TL;DR
Max profit occurs when the price of tokens in LP remains at the entry price of the position.
As long as trading fees and LP rewards earned exceed borrowing costs, the strategy remains profitable.
If the price of tokens in LP moves significantly away from the entry price too quickly, potential losses may occur before enough trading fees and LP rewards are accumulated.
This is a short volatility strategy—it benefits when price oscillates around the starting price, but sustained trends in either direction can lead to losses.
Understanding Pseudo-Delta-Neutrality
The reason we call this strategy pseudo-delta-neutral is that, like options trading, the delta (price exposure) is not fixed. While the position starts delta-neutral (no price exposure), it gradually shifts as price moves due to liquidity mechanics.
In simple terms:
The position is only truly delta-neutral at the entry price.
Max profit occurs at the entry price since yield is highest without directional exposure.
As price moves, the exposure to tokens in LP changes, making the strategy more directional over time.
How It Works
Example Setup
Initial Position Setup
Assume S is priced at 1 USDC.e
A user starts with 100 USDC.e as collateral.
A 3X leveraged position is opened by borrowing 150 S and 50 USDC.e.
The total position size is 300 USDC.e worth, which is split into:
150 USDC.e worth of S (150 S borrowed)
150 USDC.e (100 USDC.e collateral + 50 USDC.e borrowed)
Liquidity Provisioning
The user provides liquidity into an S/USDC.e LP.
The price range is set 5% above and below the starting price (i.e., 0.9–1.1 USDC.e).
The LP earns fees from trading volume and reward from staking LP in this range.
Yield vs Borrowing Costs
The position assumes a 40% APY borrow rate, which translates to 0.0922% daily interest.
The expected yield from LP fees is 1.8% per day (higher than the borrow cost).
The expected reward from LP staking is 1.75% per day
As long as yield + reward > borrow rate, the strategy remains profitable.
What Happens as Price Moves?
If price stays near 1 USDC.e, profits accumulate from trading fees and staking rewards.
If price moves toward 0.9 or 1.1 USDC.e, exposure to S increases, reducing neutrality.
If price breaks below 0.9 or above 1.1, the LP position exits the active range, reducing fee earnings and/or staking rewards.
Profit & Risk Analysis
Profit & Loss (PnL) Behavior
Max profit occurs when S price stays at 1 USDC.e.
If S price moves ±5–6% within 1 day, break-even is reached.
If S price moves ±10% over 7 days, profits remain positive, but risk increases.
If S price moves beyond the LP range before enough fees and staking rewards are earned, losses can occur.
Short Volatility & Short Gamma Strategy
This strategy is often called a "short volatility" or "short gamma" strategy.
It performs well when price oscillates around the entry point.
Sustained trending movements reduce profitability, as price exposure increases with movement.
Choosing the Right Conditions
Best Case → High trading volume near entry price (1 USDC.e) → High fee and reward earnings.
Worst Case → Sudden, strong price movements away from 1 USDC.e before fees and reward accumulate.
Risk Considerations
Impermanent loss risk → The value of deposited liquidity may decrease if price moves out of range.
Borrowing cost risk → If borrow APY increases or yield APY decreases, profitability may drop.
Market trend risk → If S trends significantly in one direction, the position becomes directional.
Summary
Pseudo-Delta-Neutral LP aims to earn yield while reducing exposure to price movements.
The strategy thrives when price fluctuates near the entry point and generates high trading volume.
If price moves too quickly, losses can occur before yield is earned.
Yield does not always equal total returns—consider price movement effects when using this strategy.
Mighty Finance provides tools to optimize pseudo-delta-neutral farming while helping users manage risk and maximize profitability.
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