Plain Vanilla

Vol # 31 - March 26th, 2021

The boss man was paying $300 for a little jar of liquid from Madagascar. 

Before I worked at an ice cream store, I had a relatively simple relationship with the frozen treat. It was like pizza, there was good and bad, but you always enjoyed it. But once I tasted the sweet vanilla ice cream from Mr. Shane’s Homemade Parlor Ice Cream… “oof”. 

In a subterranean stock room, nestled behind Main Street in a sleepy Connecticut town, my palette had a Cambrian explosion. The tiny bottle of vanilla extract from halfway around the world that cost more than my weekly paycheck made mind blowingly good ice cream.

The classic grocery store box of mixed flavors has three stripes - and everyone goes for the strawberry and chocolate first. Plain vanilla is boring. It’s the side car to your pie a la mode; more fit for a float than sitting atop a cone or at the bottom of a bowl. 

Vanilla is seen as a palette to be built upon - let’s add sprinkles and swirl in fudge! Perhaps some pralines or fruit compote. 

“Plain vanilla” has come to have broader cultural meaning. It’s lingo for the unadorned, basic flavor of anything. On trading desks where fancy exotic derivatives are exchanged - Bermuda swaps and Asian cliquets - plain vanilla options are the simple puts and calls. 

If the plain vanilla trade is too pedestrian, why don’t you step up to our double touch binary basket? Chocolate or rainbow sprinkles?

That’s just noise. Plain vanilla is the best ice cream, and puts and calls are the best way to manage your portfolio. With derivatives or dessert, complexity mostly serves to obfuscate. The boss man made a great “Carnival” ice cream with candies and cake pieces, but it obscured the purity of the vanilla base. 

The vast majority of investors just need plain vanilla. The power of writing a covered call, buying a protective put, or combining them for a simple structured product is elegant in its simplicity. The outcomes are clear and there are no gotchas waiting around the corner. 

Whether you’re putting together a trade or a confection, the ingredients matter. Plain vanilla shines when you have the premium Madagascar extract and a deft hand to aerate the slowly freezing custard. 

With trading strategies, the ingredients are centrally cleared options that trade on liquid order books, combined with systematic execution and disciplined exposure. The preparation must then match the investor’s palette. 

Adding a scoop of plain vanilla to your portfolio shouldn’t be boring. Leave the freezer burned boxes aside, and reach for something that harmonizes without stealing the show.