Protect LP positions from impermanent loss. Use options, perps, and protocol features to reduce IL exposure.
strategyAdvanced45-60 minutes7 stepsPrerequisites: LP position to hedge, Understanding of IL math, Access to perps or options, Capital for hedge position
On this page
Quick Overview
1Calculate IL Exposure
2Choose Hedging Method
3Size Your Hedge
4Execute Hedge
5Monitor Correlation
6Manage Hedge Costs
7Evaluate Strategy
Impermanent loss (IL) erodes LP profits when token prices diverge. Hedging strategies can reduce or eliminate this risk.
Understanding IL
IL occurs because AMMs rebalance your position as prices move. The more prices diverge, the more IL you suffer.
IL by Price Change:
Price Change
IL
. . . . . . .
. . -
1.25x / 0.8x
0.6%
1.5x / 0.67x
2.0%
2x / 0.5x
5.7%
5x / 0.2x
25.5%
Hedging Methods
Method
Complexity
Cost
Coverage
. . . .
. . . . . .
. . .
. . . . .
Perp hedge
Medium
Funding
Partial
Options
High
Premium
Full
Single-sided LP
Low
Reduced yield
Reduced
. -
Track IL and hedges with Fensory. Monitor all positions.
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Step-by-Step Instructions
1
Calculate IL Exposure
Determine your LP position composition and potential IL at various price points.
Tips
✓Use IL calculator tools
✓Map exposure to both tokens
✓Concentrated LP has more IL risk
2
Choose Hedging Method
Perps are most accessible. Options provide best protection. Single-sided reduces but does not eliminate.
Tips
✓Perps: easy but ongoing costs
✓Options: defined cost, full protection
✓Match hedge to exposure
3
Size Your Hedge
Calculate hedge size to offset IL exposure. Usually hedge the volatile token.
Tips
✓Hedge delta, not full position
✓Partial hedge reduces cost
✓Model various scenarios
4
Execute Hedge
Open perp short or buy options. Match notional to LP exposure.
Tips
✓Use low leverage on perps
✓Options premium is max loss
✓Document hedge ratio
5
Monitor Correlation
Hedge effectiveness depends on price correlation. Rebalance if needed.
Tips
✓LP value changes with price
✓Adjust hedge as position changes
✓Track net P&L
6
Manage Hedge Costs
Perp funding and options premiums eat into yield. Balance protection vs cost.
Tips
✓Negative funding = you pay
✓Options decay over time
✓Compare cost to LP yield
7
Evaluate Strategy
Compare hedged returns to unhedged. Decide if protection is worth the cost.