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Strategy Options

Choose the right hedging strategy based on your risk tolerance, market conditions, and investment goals.

Strategy Types

1. Dynamic Delta Hedging

Best for: Most LP positions, varying market conditions Risk Level: Moderate Adjustment Frequency: Real-time

How It Works

  • Continuously calculates optimal hedge ratio based on delta exposure
  • Adjusts hedges as price moves and liquidity shifts
  • Balances protection vs. funding costs dynamically

Advantages

  • Maximum IL protection
  • Adapts to market conditions
  • Optimal capital efficiency

Considerations

  • Higher monitoring requirements
  • More frequent adjustments
  • Potential for higher trading costs

Configuration

  • Hedge Ratio: 70-90% (asymmetric)
  • Rebalance Threshold: 0.5-1% delta change
  • Funding Limit: 0.01% daily

2. Static Hedge Ratio

Best for: Stable markets, hands-off approach Risk Level: Low to Moderate Adjustment Frequency: Manual

How It Works

  • Maintains a fixed hedge ratio regardless of market conditions
  • Only rebalances when manually triggered
  • Predictable costs and exposure

Advantages

  • Simple to understand
  • Predictable funding costs
  • Lower monitoring overhead

Considerations

  • Less responsive to market changes
  • May over-hedge or under-hedge in certain conditions
  • Manual intervention required

Configuration

  • Hedge Ratio: 50-80% (fixed)
  • Rebalance Threshold: Manual only
  • Funding Limit: No limit (user discretion)

3. Volatility-Based Hedging

Best for: Volatile markets, active traders Risk Level: Configurable Adjustment Frequency: Dynamic

How It Works

  • Scales hedge intensity based on market volatility
  • Increases protection during high volatility
  • Reduces hedging during calm periods

Advantages

  • Cost-efficient in stable periods
  • Enhanced protection when needed
  • Adapts to market regime changes

Considerations

  • Requires volatility monitoring
  • Complex optimization logic
  • May lag sudden volatility spikes

Configuration

  • Base Hedge Ratio: 40-60%
  • Volatility Multiplier: 1.5-3x during high vol
  • Volatility Threshold: 2x historical average

Advanced Options

Funding-Aware Hedging

Automatically reduces hedge ratios when funding rates become prohibitive:

  • Funding Threshold: Maximum acceptable funding rate
  • Hedge Reduction: Scale down hedges when funding exceeds threshold
  • Recovery Mode: Resume normal hedging when funding improves

Time-Based Hedging

Adjust hedge ratios based on time patterns:

  • Intraday: Higher hedging during active hours
  • Weekend: Reduced hedging during low liquidity
  • News Events: Pre-emptive hedging around major announcements

Correlation Hedging

Consider cross-asset correlations:

  • Portfolio View: Hedge based on overall exposure
  • Correlation Matrix: Account for token relationships
  • Basket Hedging: Optimize across multiple positions

Risk Parameters

Position Limits

  • Maximum Hedge Size: 150% of LP value
  • Per-Token Limits: Individual token exposure caps
  • Portfolio Limits: Total hedging exposure

Drawdown Protection

  • Soft Limits: Warning at 10% drawdown
  • Hard Limits: Stop hedging at 20% drawdown
  • Recovery: Gradual resumption after stabilization

Emergency Controls

  • Circuit Breakers: Halt during extreme volatility
  • Manual Override: User can disable automation
  • Safe Mode: Conservative hedging during uncertainty

Choosing Your Strategy

Conservative Profile

  • Recommended: Static Hedge Ratio (60-70%)
  • Focus: Capital preservation
  • Market: Stable, predictable conditions

Moderate Profile

  • Recommended: Dynamic Delta Hedging
  • Focus: Balance protection and costs
  • Market: Normal volatility conditions

Aggressive Profile

  • Recommended: Volatility-Based Hedging
  • Focus: Maximum protection
  • Market: High volatility or uncertainty

Custom Profile

  • Recommended: Mix of strategies
  • Focus: Specific requirements
  • Market: Varying conditions

Strategy Switching

You can change strategies at any time:

  1. Current Position: Strategy applies immediately
  2. New Positions: Use new strategy by default
  3. Transition Period: Gradual adjustment over 24-48 hours

Performance Monitoring

Track strategy effectiveness:

  • IL Mitigation: Protection vs. theoretical loss
  • Cost Efficiency: Hedging costs vs. LP fees
  • Risk Metrics: Volatility, drawdown, recovery
  • Optimization Opportunities: Areas for improvement

Next Steps

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