Explain the Concept of ‘Impermanent Loss’ in Options-Related Liquidity Provision

Impermanent loss is a temporary divergence in value between holding assets in a liquidity pool versus simply holding them in a wallet. While primarily associated with AMMs for token pairs, in options liquidity provision, it relates to the risk taken by the option seller (liquidity provider).

If the underlying asset's price moves significantly, the liquidity provider may be forced to pay out on the option, leading to a loss relative to if they had just held the underlying asset.