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.

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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.

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How It Works

Example Setup

1. 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)

2. 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.

3. 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.

4. 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.

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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.

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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.

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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.