Delta neutral

I think the biggest reason is probably it's 24-7, not just for the options itself, but for the Delta hedging.

So in the past, if you wanted to be Delta neutral, on, say, a long option using gamma scalping or a short option through delta hedging, you have to figure out how to hedge that throughout the weekend, right? So these firms like Optiver have 24-7 operations figuring out how to hedge out the S&P 500 through offices all around the world.

These days, you can just go on Hyperliquid and hedge or dealt out with perpetual futures.

And I think that's a pretty big innovation.

I was right about the massive volatility, but I lost all my money because I was wrong about the direction.

To solve that, institutions use a process called delta hedging.

Let's walk through the mechanics.

You buy a call option because you expect a massive volatility event.

But the source material points out a massive structural flaw in trying to execute the strategy using standard options.

There was a critical realization that hit the quant desks in the 1990s, right? That variance is the key, not volatility.

Why doesn't standard delta hedging work efficiently at scale?

It comes down to how an option's sensitivity to volatility, which we measure with the Greek letter Vega, changes over time.

They don't use that over collateralization cushion at all.

They use a delta neutral strategy.

OK.

Meaning they hold crypto assets on the spot market, but they simultaneously open an equal short position in the derivatives market.

Okay, let's slow down and break that down because Delta Neutral sounds a lot like Star Trek jargon.

Fair enough.

So basically, if they take in, say, $100 of Bitcoin as backing, they also place a $100 bet on the futures market that Bitcoin is going to go down.

If Aave just hard codes the price at $1, aren't they basically just covering their eyes?