Delta Hedger π

Create delta neutral trading strategies by utilizing a proprietary delta hedging mechanism & interface

Introduction to Delta Hedger

RiskSwap aims to deliver premier quality risk-mitigating elements that facilitate a more secure and safe trading experience without exposing even a novice trader to the unhedged risks. Specifically: Delta Hedging, Black-Scholes Model, RiskSwap Insurance, and Price Slide-Off Mitigation.

Risk Hedging is done via the Black-Scholes model and effective Delta Hedging strategy unique to RiskSwap. The concept of the Black-Scholes model is to institute risk minimization by employing a continuous buying and selling of an underlying asset and keeping the equilibrium of risk constant.

In this vein, retail investors through the RiskSwap platform will have unprecedented access to the most robust set of tools and mechanisms that in the traditional equity market is available and leveraged exclusively by large institutional players in the Finance industry. RiskSwap provides effective and proven risk management techniques that are principally embedded into the RiskSwap platform and help to preclude common risk-related predicaments: Liquidity Risk, Greek Risks, and Extreme Risks.

An option position has a certain delta, which shows how fast the value of this position will change when the underlying asset price changes. Thus, Delta hedger allows you to automatically buy or sell the underlying asset in order to keep the total position delta at a certain level.

How does it work?

Delta Hedger launch stages:

1.

User selects an asset on which the delta hedger will work.

2.

User selects a delta range, upon exiting which an order to buy/sell an asset will be placed. When the delta is in the range, no orders are placed. The order size depends on how much underlying asset must be bought or sold to reach the required delta. The delta hedger places an order of such a size that the final delta value is as close as possible to the target value (in this example, 0).

3.

User sets up additional parameters: maximum slippage; maximum possible deviation of the order price from the last price; order's lifetime that determines the maximum order lifetime. If it is not executed, the order is cancelled and a new one is placed.

Example:
Bob sold 1 BTC put options with a $25,000 strike and 1 BTC put options with a $20,000 strike, both options will expire in 2 months. The underlying asset price is $30,000 (in this case, the underlying asset for options is a BTC futures contract).

The delta for the option group 1 = -0.5

The delta for the option group 2 = -0.3

The total delta of the option position = -0.5 + (-0.3) = 0.8 (multiply by -1 since the options are sold).

In order to hedge the price change of options, the delta hedger sells 0.8 BTC, after which the position delta becomes 0.

If the BTC price drops to $29,375, the trader's uPnL will be: $500 for the BTC position; -500$ for options (in this example, we do not take into account the change in gamma, vega, theta, etc.). At this point, the options delta has changed by -0.53 and -0.32, the total position delta: 0.53 + 0.32 - 0.8 = 0.05.
The Delta Hedger is tuned to keep the delta in the range of -0.05 β 0.05. Once the position delta becomes 0.05, the delta hedger sells another 0.05 BTC, thus the position delta becomes 0 again. The user can select the delta range. The wider it is, the less often futures are bought/sold, and the less commission costs and gas fees become.

Last modified 27d ago

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