How Can an LP Use Options to Hedge against Impermanent Loss?

An LP can hedge against impermanent loss by purchasing options that profit from the price divergence of the tokens in the pool. For example, buying a "straddle" (a call and a put at the same strike price) on one of the assets can profit from large price movements in either direction, offsetting the loss incurred by the AMM's rebalancing mechanism.

This is a form of portfolio insurance.