Tuesday, October 26, 2021

Options Strategies: How To Trade Crypto Options: Kraken’s Juthica Chou

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But it’s exactly what Goldman Sachs trader Juthica Chou did. Leaving Wall Street to work in the world of cryptocurrencies was always going to be considered risky. But to leave Wall Street in 2013, during boom time, to work on a crypto derivatives exchange might have seemed crazy to some people. 

It’s a bet that paid off. The crypto derivatives market is now booming as highlighted by a recent study from Carnegie Mellon University’s CyLab.

Chou, who focused on high-frequency options market-making, packed up her desk eight years ago and co-founded LedgerX, a digital currency futures and options exchange.

“On average, the traded volume in cryptocurrency derivatives markets exceeds the regular crypto spot markets by a factor of five,” according to Kyle Soska, the lead author in the study who presented the findings at a conference.

Derivatives are financial contracts between two parties that derive their value from an underlying asset. Those assets could be stocks, bonds, as well as many other financial assets, including cryptocurrencies.

They can be used to hedge a position or simply to speculate. The most common types are futures and options.

Options trading

Juthica Chou, head of OTC options trading at Kraken

Chou facilitates crypto options trading for institutions and high-net worth individuals in her role as head of over-the-counter options trading at Kraken, the fifth largest crypto exchange, according to CoinMarketCap. 

Kraken

“It was the volatility that really I think was the impetus for why we wanted to fill this role and why I took on this role at this time, which is that it’s created a lot of interest and demand from clients for options trading,” Chou said.

Options are an agreement between two parties to buy or sell an asset at a future date. The owner has the right, but not obligation to buy, or sell the asset, at a set price by a certain date. 

They have become an important product for enhancing crypto adoption, Chou said. Businesses and individuals can hold larger amounts on the balance sheet and still manage volatility, she added.

Trading options over-the-counter means tapping into a network of individual dealers, rather than using a central exchange, such as the CME, which offers cryptocurrency futures and options, for example.  The biggest advantage of OTC is being able to execute large block trades with a degree of anonymity and without having an outsized impact on the price of the underlying asset.

“This extends to options where clients sometimes want to be able to put on a fairly significant size options trade, and again minimize the impact and the time of execution if they were to go to an exchange to do it,” Chou said.

“I don’t think they’ve been deterred by the price action,” Chou said. “And if anything, they’re just looking more opportunistically at different ways to be positioned, in our case, using options, but in general in the market.”

Much like other crypto banks and exchanges, such as Bitstamp and Anchorage, Chou is still seeing significant demand from clients despite the almost 50% drop in prices from the highs in mid-April when bitcoin was around $64,000. 

The second strategy is that, with cheaper option prices and lower volatility, some clients are looking to place opportunistic directional bets into the end of the year, Chou said.

With the volatility being lower in recent weeks with the market trading sideways, Chou has seen more players looking to sell volatility, with a view that it would go lower or just as a way to collect options premiums and yields.

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