Delta Normal Method

The delta normal method is a specific type of parametric VAR calculation that uses the delta of an option to linearize the risk. It assumes that the price of an option changes linearly with the underlying asset price.

This is an approximation that works well for small price changes but fails for large ones due to gamma risk. It is very fast to calculate making it useful for large portfolios with many derivatives.

However it is inherently limited because it ignores the non-linear curvature of option payoffs. In crypto markets where price swings are massive the delta normal method is often insufficient.

It must be supplemented with higher-order Greeks like gamma and vega to be truly effective. It is a basic building block for more complex risk systems.