Option analysts have several mathematical processes to measure the movement of an option price relative to the change in both times and the underlying stock price, plus volatility. They have been assigned a letter in the Greek alphabet and are referred to as the Greeks.
Now we hear the Greek letters constantly in the real yield narrative:
Delta neutral
Gamma neutral
Theta decay
But what does it mean for a real yield enthusiast?
1. Delta Δ
Delta measures how much an option's price will change relative to the underlying asset's price.
If the price of the underlying asset increases by $1, the price of the option will change by Delta (Δ).
As such, it gives the name we are all used to; delta neutral.
Delta Neutral Vaults is a name used for real yield vaults that farm directional yield farms but hedge the exposure of the underlying assets, making it non-directional. Explained: no matter how much the price changes, your value stays the same.
2. Gamma Γ
A measure of how much an option's Delta will change when the price of the underlying security changes.
Simply put, what happens to your Delta if the underlying asset goes up or down by $1.
Gamma helps determine whether an option's Delta will increase or decrease for moves more significant than $1 in the underlying and by how much. Proper risk management analyzes gamma. It is the Options quant gigabrains secret weapon.
So, how is it used in actual yield?
Gamma Neutral Vaults could get its yield by lending to a Delta Neutral Vault, letting them take the Delta risk. If done intra-protocol, this can be liquidation free.
Delta Neutral vaults can be skewed by changes in the underlying exposure, coupled with sudden price movements, and occur losses because they cannot stay Delta Neutral the entire time.
3. Vega ν
A measure of how much an option's price will change relative to the volatility of the underlying security.
Simply put, Vega measures the amount of increase or decrease in an option price based on a 1% change in implied volatility.
Multiple protocols are building out DeFi protocols for longing volatility.
Building Vega neutral vaults, earning yield on volatility directly is not very common in DeFi, but implicitly most delta neutral vaults already earn fees from that volatility.
4. Theta θ
Theta represents how much an option's price will change relative to time (i.e., as it gets closer to its expiration).
Simply put, as the expiry of an Option gets closer, the value of the option will decay exponentially.
What if you could earn yield because someone's Theta is decaying? When people bet on volatility, they are short on Theta and need the volatility to come as soon as possible.
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