> For the complete documentation index, see [llms.txt](https://docs.zirodelta.com/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.zirodelta.com/modules/yield-engine/delta-neutral-explained.md).

# Delta-neutral explained

"Delta-neutral" means a position designed to have no net exposure to price. If the asset's price goes up or down, the two sides of the position move in opposite directions, and what is left is the income the position earns. This is the strategy the [Yield Engine](/modules/yield-engine.md) is designed to run.

## The two legs

When funding on a perpetual futures market is **positive**, traders holding long positions pay those holding short positions, at regular intervals. To earn that payment without betting on price, the engine runs two legs of equal size:

1. **Short the perpetual.** This leg receives the funding payment.
2. **Hold the asset on spot.** This leg is the hedge.

If the price rises by $1,000, the short loses about $1,000 and the spot holding gains about $1,000. If the price falls by $1,000, the reverse happens. The net effect of price is close to zero, and the funding payment remains.

When funding is **negative**, the mirror trade would require borrowing the asset to sell it short on spot. That path is not in use: the engine only runs the positive-funding path.

## No leverage

Both legs are sized to the same notional value, and the engine does not add leverage. This keeps the position far from the levels where a leveraged trader would be liquidated.

That is not the same as "cannot be liquidated." The two legs sit in different places: the spot holding does not automatically top up the margin behind the short. In a sharp, fast rally, the short leg can run low on margin before funds are moved across, and in an extreme case it could be liquidated. The engine manages this by keeping a margin buffer and rebalancing between the legs, but the risk is real.

## What can go wrong

| Risk                   | What happens                                                                      | How it is managed                                                                                                                      |
| ---------------------- | --------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------- |
| Funding turns negative | The short leg starts paying instead of earning.                                   | The engine monitors funding and can close the position when it turns unfavorable.                                                      |
| Basis moves            | Spot and perpetual prices diverge for a while, so the legs do not offset exactly. | Usually temporary. The engine avoids closing in the middle of a divergence.                                                            |
| Fast markets           | The short leg's margin runs low before it can be topped up.                       | Margin buffer and rebalancing; no leverage.                                                                                            |
| Venue risk             | The exchange halts, changes its rules, has an outage or fails.                    | Exposure limits. This risk cannot be removed.                                                                                          |
| Fees and execution     | Trading costs and slippage reduce income and can turn small gains into losses.    | Patient entries and exits.                                                                                                             |
| Operations             | Zirodelta's servers are down when the engine needs to act.                        | Monitoring and automatic reconnection. The key that can withdraw is off-server, so an outage delays trading but does not expose funds. |

Market-neutral does not mean risk-free. Income is variable and can be zero or negative. See the [Risk Disclosure](https://zirodelta.com/risk).


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