In Options trading, the delta value serves as a crucial metric, indicating the sensitivity of an Option's price to changes in the underlying asset's price. In Bybit's Options contracts settled in USDC, the delta reflects an expected change in the option price in USDC for a 1 USDC alteration in the underlying asset price.

 

Options traders employ various strategies to capitalize on market movements. For instance, if a trader anticipates that the BTCUSDC price will remain below 60,000 within two (2) weeks, they may opt to sell a 60,000-call expiring in that period to pocket the option premium. In such cases, traders strategically manage their portfolio's delta to optimize profits within their anticipated price range, aligning with their market outlook and chosen strategy.

 

Alternatively, traders seeking gains from implied volatility often strive to maintain their delta within acceptable parameters to simplify profit and loss assessments. Since Options' delta values fluctuate with market dynamics, traders must continuously adjust their positions, primarily using Perpetual or Futures contracts, to regulate their overall Delta exposure. Consequently, Bybit provides dynamic delta hedging tools to facilitate traders in managing their volatility trading strategies effectively.

 

 

 

What is Dynamic Delta Hedging (DDH)?

Dynamic Delta Hedging (DDH) is a risk management strategy employed by traders to navigate the complexities of the volatile cryptocurrency market with precision and efficiency. Bybit's DDH function operates by automatically executing buy or sell orders for Perpetual contracts at the market price on your behalf. It dynamically adjusts the Delta of your investment portfolio every six (6) seconds, ensuring the delta of your Options contract remains within the desired range and responds to market trends promptly.

 

Currently, this feature is compatible with Cross Margin mode and Portfolio Margin mode under the Unified Trading Account, providing flexibility in risk management strategies.

 

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Option Greeks

Key Advantages

• Automated Adjustments: Adjusts delta every 6 seconds for timely responses to market fluctuations.

• Risk Mitigation: Maintains delta within the desired range, reducing exposure to market volatility.

• Enhanced Profit Potential: Capitalizes on market trends promptly for improved profitability.

 

 

 

 

 

 

 

 

Risk

While DDH offers substantial benefits in managing portfolio risk and maximizing profitability, it's essential to acknowledge the associated risks:

 

• Enabling DDH may result in the automatic closure of existing positions and unnecessary hedging with existing orders created manually. This occurs because the DDH strategy constantly monitors the portfolio's Delta and takes action to maintain a balanced Delta exposure within the predefined safety range. Therefore, it's not advisable to manually place orders for the corresponding underlying asset's Perpetual contract when activating DDH. Doing so may cause the delta value to exceed the preset range, potentially resulting in automatic position closure by the strategy.

• In case of failed orders due to insufficient funds available in your account, the delta hedging strategy will be automatically terminated.

• If the margin mode is switched to a mode not supported by the strategy, such as Isolated or Cross Margin mode during the strategy process, the strategy will be terminated.

• Orders filled through the delta hedging strategy will remain held even after the strategy is terminated.

• Bybit assumes no liability for any risks arising from the activation of DDH.

 

 

 

 

 

 

 

 

How Dynamic Delta Hedging (DDH) Works

Let's delve into the example to illustrate how DDH functions in different market scenarios:

Example 

DDH Strategy Setup:

Coin: BTC

Delta Safety Range: -1 to +1

Delta Target: 0

Hedge With: USDT Perpetual

Trigger Duration: 1 minute

Trigger Amplitude: 0.5%

 

Assuming the BTC price is $40,000, the user's position at T0 is:

 

 

 

At T1, the BTC price rises to $41,000:

 

 

At time T1, the total delta for the user's BTC position is +2, exceeding the upper limit of Delta Upper limit +1. Market fluctuation within the past minute stands at 2.5%, exceeding the preset 0.5% threshold, thus satisfying the conditions for hedging.

 

The quantity of BTCUSDT Perpetual to sell is determined as follows:

Sell Quantity = Min(Max(Delta Target Value−Total Currency Delta,−Max Order Size),−Single Contract Size)

=Min(Max(0−2,−100),−0.0001)=−2

 

After executing the sale, the Delta value is adjusted to 0. It's important to note that if the Delta value fails to return to the safe range after a single hedging due to the maximum single order volume limitation, the strategy refrains from immediately placing further orders to prevent market disruption. Instead, it waits for six (6) seconds before reassessing the currency's delta before initiating another order.

 

 

At T2, the BTC price drops to $39,000:

 

 

At time T2, the total delta of the user's BTC position is -3.8, exceeding the lower limit of Delta Lower limit -1. The market fluctuation within the past minute is calculated as 4.9%, surpassing the predefined 0.5% threshold and meeting the criteria for hedging.

 

The quantity of BTCUSDT Perpetual to buy is determined as follows:

Buy Quantity = Min(Max(Delta Target Value−Total Delta of the Currency,−Max Order Size),−Single Contract Size)

=Min(Max(0−(−3.8),−100),−0.0001)=3.8

 

After executing the buy order, BTCUSDT Perpetual closes the position for 3.8 BTC. The profit and loss of this position can be calculated as follows:

Profit/Loss=3.8×[(40,000×10+41,000×212−39,000)]

=3.8×(1,166.66)=4,433.3 USD

 

This calculation does not consider handling fees. After the buy order, the Delta value returns to 0.

 

 

At T3, BTC price returns to $40,000:

 

 

At time T3, the total delta of the user's BTC position is +1.8, surpassing the upper limit of Delta Upper limit +1. The market fluctuation within the past minute is calculated as 2.56%, exceeding the predetermined 0.5% threshold and satisfying the conditions for hedging.

 

The quantity of BTCUSDT Perpetual to sell is determined as follows:

Sell Quantity = min(max(Delta Target Value−Total Delta of the Currency,−Max Order Size),−Single Contract Lot size)

=min(max(0−(+1.8),−100),−0.0001)=−1.8

 

After executing the sell order, the delta value returns to 0.

 

 

During T0 to T3, BTC prices fluctuated from $40,000 to $41,000 to $39,000 and back to $40,000. Without dynamic hedging, the account would have no additional profit, with realized and unrealized gains totaling $0. However, with dynamic hedging, the account gained $4,433.3 in realized profit and $1,366.6 in unrealized profit, totaling $5,799.9 in profit.

 

Note: This calculation does not account for time decay, changes in implied volatility, and transaction fees.