The S&P 500 itself seems straightforward enough: It's what you would get if you bought a little bit of the largest companies on the market. I understand that there are also options on the index, which are based not on shares but cash equivalent to the value of the index.
However, now many companies also offer S&P ETFs. The major ones track the index very closely and have sizable weight themselves. For example,
SPY by itself is apparently about $200B in assets, meanwhile the S&P500 together are $18.5T. So
SPY alone is already 1% of the S&P. On top of that, I imagine not all of that $18.5T is invested "in the index" per se, there are a lot of shares held as individual stock picks by investors who are thus not really part of your "index trading pool", since their behavior is influenced by something (that individual company), which has very little relation (1 in 500!) to what an index investor trades (either a huge basket of shares or more realistically an ETF, which is itself a basket of shares). So surely the impact of the
SPY on the S&P index market is even greater than the 1% figure implies. And then there are also other sizable funds, like
These ETFs also all have their own option chains. Let's consider only the at-the-money (more precisely, the first in-the-money strike) calls expiring Sep 16 2016:
SPX(I would get cash, not shares) calls at 2180, the open interest is 42k and IV is 9.35%.
SPYcalls at 218 the OI is 72k, and IV is 8.97%. 218.5 is also ITM but strangely the OI is 0.
IVVcalls at 215, OI is 1301, IV is 12%.
VOOcalls at 200, OI is 98 (even though
VOOis about 2/3s as big as
IVV) and IV is 9.52%.
This seems like a pretty big difference, and it is not correlated to the market caps at all! Note that these calls all represent bets on the same probability: That of the S&P not moving much above its current level by Sep 16. Well, technically the latter ones are bets on the ETFs not moving above, but what are the odds of the ETFs moving without the index? These are very large ETFs ran by serious companies!
Suppose I wanted to "invest in the index", specifically via options. Of course I must first understand what options and stock to actually buy, but I must also understand what factors influence the market.
With a single stock, like
AAPL, it's easy: You have the
AAPL shares, you have the
AAPL options, and then you have the external factors. With the S&P, I'm very confused. There seem to be different, parallel markets for both shares and options, and while the ETFs track closely, the options don't appear to have been arbitraged to the point of only trivial separation.
Specifically, I feel like I could start trading options in
IVV, and this could affect the options in
SPY, and if I only paid attention to the
IVV option market I could be blindsided by the
SPY traders, since from my perspective it would act like a shadow pool. So it seems that I must keep track of every major S&P ETF as well as the index itself, which is itself impossible, since I don't know how many people out there actually hold a basket of S&P shares as opposed to small subsets of it. But also, surely the price of the underlying must be affected by the option traders (in fact some option strategies involve trading the underlying, like covered calls), but how can these ETFs correlate so well if their option chains are so different?
How do people who trade S&P options deal with this confusion? Is there some simple rule of thumb? Do they just pick one ETF and pretend the rest of the world doesn't exist? Are they constantly evaluating arbitrage potential, by running the calculations of a trade through every separate ETF market first? Is there a way to somehow synthesize these separate markets into a sort of S&P "metamarket" and "meta option chain" that is fully informative?