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.
Glossar
Price Divergence
Discrepancy ⎊ Price Divergence occurs when the quoted price of an asset or derivative across two different venues or instruments deviates significantly from their theoretical parity relationship, creating an arbitrage opportunity.
Options Trading Risk
Exposure ⎊ Options Trading Risk encompasses the potential for loss arising from adverse price movements, volatility changes, or liquidity constraints specific to options contracts on digital assets.
IL Insurance
Mitigation ⎊ Impermanent Loss (IL) insurance within cryptocurrency derivatives functions as a financial instrument designed to offset potential reductions in asset value stemming from liquidity provision in Automated Market Makers (AMMs).
Options Derivatives
Framework ⎊ Options derivatives within cryptocurrency represent a structured framework for managing exposure to price volatility, extending beyond traditional equity or commodity options.
Options Premium
Component ⎊ Options Premium is the upfront monetary consideration paid by the purchaser to the writer for the right, but not the obligation, to transact the underlying crypto asset at a specified price by a specific date.
Long Straddle
Structure ⎊ This strategy involves the simultaneous purchase of an at-the-money call and an at-the-money put option on the same underlying crypto derivative.