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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.
But it's exactly what Goldman Sachs trader Juthica Chou did.
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.
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.
"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 tradingChou 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.
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.
"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."
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.
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.
Can individual traders still play in the market?Just because more institutional clients are entering the market, doesn't mean there aren't still opportunities for individual traders.
"There's more human intuition and understanding the flows and the psychology of the market at any given time," Chou said. "I think in some ways, it definitely resembles earlier days of trading."
This opens the environment up to smaller players. Chou compares the size of the market of all major crypto assets to the market capitalization of one very large stock.
"If you think about a lot of the very large hedge funds, the very sophisticated players, it doesn't really make sense for them to invest a lot in crypto trading right now, because they can't put that much money to work to make a sizable amount of money that's meaningful for them." Chou said.
Where to start in options?However, smaller players can put money to work and the opportunities will be meaningful to them, Chou said.
"There isn't a need to rush into options per se," she added.
The most interesting opportunities for the average crypto trader is the ability to earn yield or interest off their crypto asset, Chou said.
They can do this by selling a call option, which gives the option owner the right, but not the obligation, to buy that crypto asset. So they could agree to sell bitcoin above a certain price, for example $50,000 in August and they could receive a premium in payment for that option, for say, $200, she said.
"What's nice about putting on these positions is that they are somewhat risk-limited," Chou said.
It's a prudent way to dip their toes into options, she added.
"All they're doing is basically giving up a little bit of upside on their position in order to earn some dollars today," Chou said.
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