How Does the Concept of ‘In-the-Money’ Options Relate to the Active Range of a Concentrated Liquidity Position?
An option is 'in-the-money' when exercising it would be profitable, meaning the strike price has been breached favorably. Similarly, a concentrated liquidity position is 'active' (earning fees) when the spot price is 'in-the-range.' When the price moves outside the range, the position is 'out-of-the-money' (inactive), and the LP must wait for the price to return to become profitable again, much like an option holder waiting for the strike to be breached.
Glossar
Active Range
Scope ⎊ Active Range, within cryptocurrency derivatives, delineates the price band where an option’s delta ⎊ a measure of price sensitivity ⎊ exhibits substantial change, influencing trading strategies and risk assessments.
Concentrated Liquidity Position
Mechanism ⎊ A concentrated liquidity position within automated market makers represents a strategic allocation of capital to a specific price range, differing from traditional liquidity provision by enabling capital efficiency.
Concentrated Liquidity
Allocation ⎊ ⎊ Concentrated liquidity represents a departure from traditional automated market maker models by enabling liquidity providers to specify precise price ranges where their capital will be deployed, fundamentally altering capital efficiency.