How Can a Delta-Neutral Hedging Strategy Be Constructed Using Options to Mitigate Impermanent Loss?

A delta-neutral strategy aims to have a portfolio value that does not change with small price movements of the underlying asset. To hedge impermanent loss, a liquidity provider can short a perpetual future or buy a put option on the more volatile asset in the pair.

The size of this hedge should be calculated to offset the expected loss from price divergence. This strategy requires active management, as the "delta" of the liquidity position changes with the asset's price, necessitating adjustments to the hedge.