An Introduction to Advanced Auto DDH
I. Similarities and differences Between Auto DDH and Advanced Auto DDH
1. A comparison of interfaces
2. Whether dollar-based hedging is supported
3. Selection of hedging contracts
4. Selection of parameters
(1) Deviation Delta
(2) Delta Target
(3) Delta Threshold
(4) Hedging Ratio
II. Cases
Case 1: A hedging ratio of 100%
Case 2: A hedging ratio of 50%
Case 3: A hedging ratio of 150%
I. Similarities and differences Between Auto DDH and Advanced Auto DDH
In the interface of Greek.live’s advanced trading tools (greeks.live/ddh), you can see two versions of dynamic delta hedging (DDH), namely Auto DDH and Advanced Auto DDH. See the picture below:
In general, by default, only the same threshold can be set in long and short directions and only hedging with perpetual contracts is supported in Auto DDH. In comparison, under the Advanced Auto Hedging mode, traders may choose between long contracts and short contracts; the thresholds in long and short directions can be different; and the hedging ratio can be customized (0–150%).
Both Auto DDH and Advanced Auto DDH check for portfolio Delta exposure every 5 seconds.
1. A comparison of interfaces
2. Whether dollar-based hedging is supported
Auto DDH only supports coin-based hedging, whereas Advanced Auto DDH supports both dollar-based and coin-based hedging. Click the button pointed by the arrow below to switch between the two versions.
3. Selection of hedging contracts
By default, Auto DDH only supports hedging with perpetual contracts, while Advanced Auto DDH supports contract selection in both long and short directions, as shown in the picture below.
4. Selection of parameters
There are three main parameters: Delta Target, Delta Threshold, and Hedging Ratio. In addition, we introduce the concept of Deviation Delta.
(1) Deviation Delta
Deviation Delta represents the absolute value of the difference between the current position Delta and the Delta Target, differentiated between positive and negative directions.
When Delta Target < current position Delta, the Positive Deviation Delta is shown in the picture below (the further to the right the axis, the larger the value).
When Delta Target > current position Delta, the Negative Deviation Delta is shown in the picture below.
For example, if your Delta Target is set to be -3 BTC:
- - If the current Delta is -2 BTC, then the Positive Deviation Delta is 1 BTC and the Negative Deviation Delta is 0.
- - If the current Delta is -4 BTC, then the Negative Deviation Delta is 1 BTC and the Positive Deviation Delta is 0.
(2) Delta Target
Delta Target represents the target Delta value of your Auto DDH, i.e. the number of bitcoins (coin-based) or the amount of USD (dollar-based) you need to adjust the Delta to the threshold each time.
Take dollar-based hedging for example. You can customize the target value of Delta after the hedge is completed.
- If you want the direction to be strictly neutral, put 0 here.
- If you want the overall Delta position to be long, e.g. 5 BTC long, put 5 here.
- If you want the overall Delta position to be short, e.g. 3 BTC short, put -3 here (i.e. minus 3).
Both Auto DDH and Advanced Auto DDH support filling in coin-based Delta Target. Advanced Auto DDH also supports dollar-based Delta Target.
(3) Delta Threshold
In Auto DDH version, the positive and negative Delta Thresholds are the same by default. In Advanced Auto DDH version, the positive and negative Delta thresholds can be customizable and can be filled in with different values, provided that both values should be greater than 0.
When the Deviation Delta of the portfolio exceeds the threshold, a hedge is triggered to match Delta to the Delta Target (the distance of Delta from the Delta Target after the hedge is completed depends on the hedging ratio).
- A long hedge is triggered when the Delta Target< total position Delta and the Positive Deviation Threshold exceeds the Positive Delta Threshold.
- A short hedge is triggered when the Delta Target > total position Delta and the Negative Deviation Threshold exceeds the Negative Delta Threshold.
(4) Hedging Ratio
The hedging ratio represents the hedged amount as a percentage of the Deviation Delta and should be between 0 and 150%.
- A hedging ratio of less than 100% means that the hedged amount is less than the Deviation Delta, and the minimum ratio needs to be greater than 0.
- A hedging ratio of more than 100% means that the hedged amount is greater than the Deviation Delta, and the maximum ratio should be no more than 150%.
Warm prompt: After ticking the “Switch On” option, click “Submit” to run the program.
II. Cases
Take coin-based hedging for example. Suppose you want your Delta Target to be around -3฿ and your current position has a total Delta of -2.5฿, then the Deviation Delta at this point is 0.5฿.
Case 1: A hedging ratio of 100%
If you set a Positive Delta Threshold of 1฿, a Negative Delta Threshold of 0.5฿, and a hedging ratio of 100%, at this point the Positive Deviation Delta is less than the Positive Delta Threshold, so no hedge is triggered.
- When the total Delta rises to -2฿, the Positive Deviation Delta is 1฿, triggering the Positive Delta Threshold, and the long contract is hedged once. The total Delta returns to the Delta Target of -3฿ after the hedge is completed.
- When the total Delta drops to -3.5฿, the Negative Deviation Delta is 0.5฿, triggering the Negative Delta Threshold, and the short contract is hedged once. The total Delta also returns to the Delta Target of -3฿ after the hedge is completed.
Since the hedging ratio is 100%, the total Delta will be exactly equal to the Delta Target, i.e. -3฿, regardless of whether hedge is triggered.
In this case, the total Delta of your position will be strictly controlled between -3.5฿ and -2฿ (the premise is that the program checks the Delta exposure once in 5 seconds and the Delta movement during this period is ignored).
Case 2: A hedging ratio of 50%
The hedge trigger conditions are the same as Case 1 except that the hedging ratio is changed to 50%. Nevertheless, the total Delta after the hedge is completed will be different.
- When the total Delta rises to -2฿, the Positive Deviation Delta is 1฿, triggering the Positive Delta Threshold, and the long contract is hedged once. The total Delta becomes -2.5฿ after the hedge is completed.
- When the total Delta drops to -3.5฿, the Negative Deviation Delta is 0.5฿, triggering the Negative Delta Threshold, and the short contract is hedged once. The total Delta becomes -3.35฿ after the hedge is completed.
Case 3: A hedging ratio of 150%
The hedge trigger conditions are the same as Case 1 except that the hedging ratio is changed to 150%. However, due to over-hedging, the total Delta after the hedge is completed will be different.
- When the total Delta rises to -2฿, the Positive Deviation Delta is 1฿, triggering the Positive Delta Threshold, and the long contract is hedged once. The total Delta becomes -3.5฿ after the first over-hedge is completed. The Negative Deviation Delta now is 0.5฿, triggering Negative Delta Threshold, and the short contract is hedge once. After the second over-hedge is completed, the total Delta becomes -2.75฿.
- When the total Delta drops to -3.5฿, the Negative Deviation Delta is 0.5฿, triggering the Negative Delta Threshold, and the short contract is hedged once. The total Delta becomes -2.75฿ after the hedge is completed.
