Achieving Stable Returns with Delta Neutral Strategies | A Practical Guide to Yield Arbitrage

What Generates Profit

In the world of cryptocurrencies, there are ways to earn income that are unaffected by price fluctuations. This is the delta-neutral position strategy. In simple terms, it involves holding both long and short positions to hedge against price movements while earning profits from both sides. Especially during active market periods, this strategy provides stable returns and is supported by many professional traders and funds.

In this article, we will explain in detail how the delta-neutral strategy works, how to implement it, and provide actual revenue simulations.

What is Delta-Neutral | Basic Position Construction

A delta-neutral state means constructing a position that is completely insulated from asset price fluctuations.

Let’s give a concrete example. If an investor holds a short position in BTC worth and a spot BTC holding worth simultaneously, the theoretical value of the entire position remains zero regardless of how the price moves (excluding fees and slippage).

If BTC rises, a loss of $20 occurs on the short side, but the value of the spot holdings increases by $20, resulting in an overall zero profit. Conversely, if the price falls, the same applies.

To create such a structure, it is common to sell a position in perpetual futures while holding buy-side assets in wallets or staking. For example, holding 1 ETH in your wallet and simultaneously shorting 1 ETH in on-chain futures.

Two Income Sources Generated by the Delta-Neutral Strategy

The interesting aspect of this position setup is that profits can be generated from both sides even if the price remains unchanged.

First Income: Funding Rate

In the perpetual futures market, a mechanism called the “funding rate” functions to adjust for market participant bias. When there is a persistent long bias, long holders pay fees to short holders.

For example, when many traders are long BTC, futures prices can exceed spot prices. To bridge this gap, the funding rate activates, periodically transferring funds from the long side to the short side.

Looking at actual data, on some on-chain futures platforms since the beginning of the year, the average funding rate for BTC has been about 0.00118% annually, which translates to approximately 10.32% per year. Over the past 30 days, similar trends continue, providing a stable income source for short holders.

However, note that the funding rate can turn negative during certain periods. In such cases, short positions pay fees, reducing the strategy’s profitability.

Second Income: Yield from Spot Side

Holdings in the delta-neutral strategy (long side) can earn yields through various methods.

For example, holding stETH yields about 3% APY from ETH staking. More advanced methods involve utilizing protocols like Pendle that issue fixed-yield tokens (PT), allowing for higher yields.

Specifically, PT-LBTC (from certain providers) offers a fixed APY of 7.51% over 84 days, providing a stable income on the spot side.

Practical Example ①: Implementing a Delta-Neutral Strategy with BTC

Let’s translate theory into practice.

Short Side: Selling BTC via On-Chain Futures

Long Side: Holding PT-LBTC (Fixed Yield Product)

Using the figures above, you can expect an annual income of 10.32% from the short side and 7.51% from the long side.

Applying 2x leverage, the combined effect results in an overall annual APY of approximately 11.89%. Continuing this strategy with a $50,000 position over 84 days could yield about $1,376 (2.7%) in profit.

However, using leverage introduces liquidation risk. With 2x leverage, if BTC rises to about $88,000, a forced liquidation could occur. Increasing leverage to 3x raises the annual return to 13.37%, but the liquidation price drops to around $78,000, significantly increasing risk.

Market Conditions Greatly Influence Profitability

Interestingly, the profitability of this strategy heavily depends on market conditions.

During the active market at the start of the year, some Pendle ETH-related tokens offered fixed annual rates exceeding 25%. At the same time, funding rates exceeded 30% annually.

Under such favorable conditions, a 2x leverage could achieve approximately 36.67% APY. While such hot market conditions are limited, capturing this opportunity can make the strategy highly attractive.

Essential Risk Management

While delta-neutral strategies appear ideal, their implementation involves several precautions.

Shorting low-liquidity tokens is particularly risky. Many insiders and early investors holding tokens during project lock-up periods tend to hedge their positions by shorting futures. Increased selling pressure can cause funding rates to turn significantly negative, erasing arbitrage profits.

Additionally, some tokens exhibit high price volatility, risking unexpected liquidations of short positions. For example, tokens offering high fixed yields often have more volatile underlying assets.

About Vertex Protocol

The platform for implementing this strategy is Vertex Protocol. It supports cross-margin futures trading across multiple blockchains (Arbitrum, Mantle, Sei, Blast, Base) with over 50 trading pairs.

Vertex Edge, its liquidity engine, provides access to multi-chain liquidity, enabling trades with reduced slippage. The new economic model for VRTX tokens, called the “VRTX Vertical Program,” features automatic compounding of staking rewards and incentives for market makers. The staking APY for VRTX typically ranges from 20% to 30%.

Strategy Evaluation: Balancing Returns and Challenges

An annual APY of 10–15% may not seem impressive compared to some stablecoin farming strategies. However, the main appeal of the delta-neutral strategy is that it achieves this return while completely eliminating price fluctuation risk.

In active markets, APYs exceeding 30% are achievable, greatly enhancing profitability. The key is to monitor funding rates and Pendle-related token yields in real-time to seize market opportunities.

Summary

The delta-neutral strategy is the most sophisticated form of yield arbitrage. It allows investors to extract profits from market gaps without being affected by price swings, making it popular among institutional investors and funds.

However, it is crucial to be aware of liquidity risks, funding rate fluctuations, and liquidation risks. Before deploying the strategy, thoroughly understand these risks and carefully set position sizes and leverage ratios to ensure success.