With the market closed for good Friday I'm getting a little stir crazy, I NEED A GREEN TICK! Here's a quick aside I contemplate when thinking about derivatives and how many layers we have, where we've come from and how much deeper we could go.
I also mention this when explaining the journey from stocks (which most people understand) to how we get to SVXY options.
So here is the dive to the Challenger deep:
S&P Stocks- this is where we start, where everyone understands. Apple, Microsoft, etc.
S&P Options- the first layer of derivatives, based on the above stocks.
Spot VIX- the actual VIX index, based on the Black-Scholes calculation of 30 day S&P options (above)
VIX Options- we can't trade the spot VIX, its just a number, so VIX options allow bets on the index and are cash settled.
VIX Futures- the futures /VX and further out are based on the VIX options at the money price at the corresponding expiration.
VIX ETFs- These are trade-able products that act like stock, based on combinations of VIX futures, constantly being rebalanced between the first 2 months or further out depending on the product. Here we have VXX, XIV, UVXY, SVXY, TVIX and more.
SVXY Options- Of the VIX ETFs, just UVXY and SVXY have options so far, thus that is the main product I use, allowing access to time decay and varied leverage on short/long volatility. At this point we are on the 7th layer down of derivatives, sunlight does not penetrate this far down.
How much deeper can we go? Obviously increased volume/liquidity would lead to options on all the ETFs, as well as new ETFs (VMIN, VMAX are slightly "more accurate" versions of VXX, XIV).
While I do revel in how arbitrary all of this is, I do have to remember that even at 7 layers down in derivatives, these all eventually lead back to S&P stocks, so I guess we still are in reality. Thanks for joining me on the dive!