How to do Delta Neutral Arbitrage with Pendle’s yield market

Lambro strategy inspired from pendle fi AMA chats

How to spot Delta Neutral farming on @pendle_fi

Lambro strategy inspired from pendle fi AMA chats

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How to do Delta Neutral Arbitrage with Pendle’s yield market

📍In this thread

1️⃣ How does Delta neutral works with Pendle

2️⃣ How to spot delta neutral opportunity $ape coin Example

3️⃣ What are the risk ?

4️⃣ Capital efficiency & Worth the risk?

1️⃣ How does Delta neutral works with Pendle

🔹What is Delta neutral

🔹How do Delta neutral work in Pendle

🔹What is delta neutral

Delta neutral is a strategy where you take upside and downside positions which ultimately balance out to neutral/zero exposure.

E.g.

if Single staking ETH gives 5% apy and it's cost to short is 3%apy

You can buy 1 ETH and short 1 ETH,

meaning you are longing 1 eth and shorting 1 eth at the same time

Hold +1 ETH (Long) + Short -1 ETH(Short) = 0 ETH price movement of eth does not effect u.

And 5%-3% = 2% u have 2% delta neutral yield

🔹How do Delta neutral work in Pendle

1. Buy PT on pendle ( Long )

2. Short on Perp CEX ( Short )

3. Earn the difference

2️⃣ How to spot delta neutral opportunity $ape coin Example

Im going to use $APE as example

1 ) Check is there opportunity

Check $APE PT token on Pendle

• Price on Pendle 4.06 ( 119 days )

• Price elsewhere 5.14

🔹“Discount” 21.1%

2 ) Check Funding rate on CEX ( or other money market to short )

• Binance funding rate is 0.0521

• Funding rate is every 8 hours

• 1day shorting cost = 0.0521*3 = 0.1563 per day

• Pendle maturity time is 119days

🔹Cost of shorting for 119 days = 0.1563 * 119 = 18.5997%

3️⃣ Comparing the difference

• I can buy $APE (PT) token with 21.1% discount and redeem 1 APE token in 119days

• I can short $APE on binance with 18.5997%

You can buy

1 $APE(PT) on Pendle (Long) for 21.1% discount and Short on Binance for 18.5997%

🔹Delta Neutral Arbitrage ROI = 21.1%-18.5997% = 2.5%

4️⃣ What are the risks

1. change of funding rate

2. change of discount price (PT token price)

3. liquidation

4. ftx type of rekt lmao

1 ) change of funding rate

As you can see from the chart, "Shorting cost" (funding rate) actually changes constantly.

Your true cost of shorting is actually the constant changing of funding rate.

2 ) Change of discount price (PT token price)

If the funding rate > discount and you decided to unwind the position the APE(PT) token price might drop more in relation to $APE end up making a loss in PT token.

3 ) Liquidation

If the price of $APE is too volatile and you don’t have enough collateral in Binance you might get liquidated

4 ) ftx type of rekt lmao

CEX decided to fuck us in the ass again and go bankrupt

4️⃣ Capital efficiency & Worth the risk?

🔹Capital efficiency

Essentially means how much money you are using to earn this yield

tldr

Capital efficiency = Total Capital need / Current APE price

Heres an example of how to work out “capital efficiency” for who wants to learn

Leverage = n

Perp Cost (shorting) = (Current APE price)/n

Total Capital need = SUM(Perp Cost + Pendle Cost)

Current APE price = 5

Capital efficiency = Total Capital need / Current APE price

E.g.

APE = 5$

Pendle ape Cost = 4

Leverage 2.5x on cex perp

Perp Cost = 5/2.5 = 2

Total Captital = 2 + 4

Capital efficiency = 6/5 = 1.2x

The number supposedly the lower the better (more efficient) however it also means you might get liquidated easier.

As u can see we will get liquidated if ape goes up by 50% as our leverage is 2.

U can tune up the capital efficiency with higher leverage with more liquidation risk

🔹Worth the Risk?

As you can see the Delta Neutral return right now at snapshot is only 2.5%

It is your view on whether this will change or stay consistent

Ideally you want to run some backtests & consider different factors based on the trade & market

Do not mix with Risk free & delta neutral, as u can see from example above there are a lot of moving parts and possibly rebalancing constantly.

Most Delta Neutral strategy is not hard, just consistently monitoring & balancing is the hard part.

if you guys like i can break down some GLP delta neutral strategy with different rebalance.

DM, or comment below if u guys want me to do some backtest + examples of GLP Delta Neutral