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How Do Options Derivatives Interact with IL Insurance Mechanisms?

Options derivatives can be used by the protocol to hedge the IL risk. The protocol can purchase or write options to create a synthetic position that profits when the price divergence occurs, offsetting the LP's loss.

This transforms the IL risk into a manageable options trading risk for the protocol's treasury or a third-party risk manager.

What Is the Primary Mechanism That Offsets Impermanent Loss for Liquidity Providers?
What Is Impermanent Loss and How Does It Affect Liquidity Providers for Derivative Pools?
Beyond Trading Fees, What Other Incentives Might a DeFi Protocol Offer to Mitigate Impermanent Loss?
What Is “Impermanent Loss” in the Context of DeFi Smart Contracts, and How Do L2s Indirectly Mitigate It?