Tom Sosnoff | Option Trading Strategies w/ (TIP395)

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In this section, Trey Lockerbie welcomes Tom Sosnoff to the show and discusses his journey as an entrepreneur and investor.

Introduction to Tom Sosnoff

• Trey Lockerbie introduces Tom Sosnoff as his guest on the show.

• Trey expresses his admiration for Tom and credits him for sparking his interest in investing.

• They briefly touch on Tom's entrepreneurial journey, including the success of ThinkOrSwim platform and the billion-dollar acquisition of TastyTrade.

Celebrating Success

• Trey asks Tom how he celebrated selling his company for a billion dollars.

• Tom shares that he didn't do anything special to celebrate and emphasizes their "no high-fives" rule.

• They discuss how big moments in entrepreneurship often become business as usual once achieved.

Core Tenets of Success

• Trey asks if there are any core tenets that have led to Tom's success.

• Tom reflects on the importance of taking risks and having a strong belief in what they are doing.

• He mentions not worrying about losing and having a mindset of leaping without being concerned about whether there is a safety net or not.

Authenticity in Building TastyTrade

• Trey highlights the authenticity of TastyTrade's brand and programming, which resonated with viewers.

• They discuss creating a connection between personalities, snarkiness, and the trading business.

• Tom explains that they wanted to create a big playground and engage people through silliness and fun.

Building TastyTrade

• Trey asks if building TastyTrade was a scratch-your-own-itch approach or bringing their own personality to it.

• Tom mentions being confident in their know-how of the space they were in and having a foundation for what they were building.

The transcript provided does not cover the entire conversation between Trey Lockerbie and Tom Sosnoff.

The Meaning of Money and Building a Legacy

In this section, Tom Sosnoff discusses the significance of money and the pursuit of success. He also talks about his entrepreneurial journey and the intention behind building ThinkOrSwim and TastyTrade.

The Significance of Money

• The numbers didn't matter anymore as they did in the early stages of their trading career. Making money became less important over time.

• Validation for being successful and making money was initially sought after, but later on, it became less significant.

• The focus shifted towards wanting to leave a legacy as successful entrepreneurs rather than just accumulating wealth.

Building ThinkOrSwim and TastyTrade

• ThinkOrSwim was built over a span of 10 years before it was sold to TD Ameritrade.

• TastyTrade, on the other hand, faced challenges in finding interested parties for acquisition until 2020.

• After receiving multiple cash offers for TastyTrade, they decided to sell because they were ready for something different.

Tom's Passion for Trading

In this section, Tom Sosnoff expresses his love for trading and how it remains an integral part of his life even after moving on from ThinkOrSwim and TastyTrade.

Tom's Love for Trading

• Tom still actively trades and averages over 100 trades per day.

• Trading is not just a job but a passion that he thoroughly enjoys.

• He finds fulfillment in running the business, hosting shows, building technology, and engaging in trading activities.

Advantages of Selling Options

In this section, Tom Sosnoff explains why selling options can be advantageous compared to buying options.

Selling Options vs Buying Options

• Theoretically, there is no inherent advantage in selling options over buying options as markets are priced efficiently.

• Tom prefers to force the market to beat him rather than trying to outsmart the market.

• Selling options allows him to take a more passive approach and let the market try to outsmart him.

Timestamps have been associated with relevant bullet points.

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In this section, Tom Sosnoff discusses the concept of unlimited losses and limited profitability for achieving a high probability of success in trading. He explains how options differ from stocks, futures, and digital assets.

The Simple Model for Success

• To have a high probability of success, one must have unlimited losses and limited profitability.

• This concept is often difficult for people to understand.

• Options are strategic instruments compared to stocks, futures, and digital assets which are more black and white.

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Tom Sosnoff explains the appeal of using strategies with limited profitability and unlimited risks in trading. He emphasizes that this approach offers a higher chance of being successful based on mathematical models.

Limited Profitability and Unlimited Risks

• Using strategies with limited profitability and unlimited risks can increase the chances of success.

• This approach is based on mathematical models that prioritize a higher probability of being right over unlimited profitability.

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Tom Sosnoff shares his preference for the sell-side and short premium side in trading. He believes that combining multiple wins is more effective in the long run than aiming for occasional home runs.

Preference for Sell-Side Trading

• Tom Sosnoff prefers the sell-side and short premium side in trading.

• Combining multiple wins leads to long-term success rather than relying on occasional big wins.

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Trey Lockerbie asks about selling naked puts as a popular strategy. Tom Sosnoff explains why selling naked puts has the highest statistical chance of success among various strategies.

Selling Naked Puts

• Selling naked puts has the highest statistical chance of success among all strategies.

• Markets have positive drift embedded in them, which means they tend to have a small upward drift over time.

• Selling puts involves selling something expensive with a high probability of success and limited profitability.

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Tom Sosnoff elaborates on the concept of selling puts and its advantages compared to buying stocks when bullish on an asset.

Advantages of Selling Puts

• Selling out-of-the-money puts provides a higher probability of profit compared to buying stocks.

• While it limits profitability, it offers an 80% chance of being right.

• Some traders prefer the higher probability of being right over unlimited profitability.

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Trey Lockerbie discusses the relationship between option pricing and implied volatility. Tom Sosnoff explains that implied volatility is a metric for expected move and how it affects option pricing.

Implied Volatility and Option Pricing

• Implied volatility is a metric for expected move or fear in the market.

• Selling options during high implied volatility periods can be advantageous.

• Downward moves in the market often coincide with high implied volatility, making it suitable for selling puts.

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Trey Lockerbie asks about layering options strategies on top of a buy-and-hold portfolio. Tom Sosnoff emphasizes the accessibility of trading platforms and the benefits of improving basis through layered strategies.

Layering Strategies on Top of Portfolios

• It is possible to layer options strategies on top of any static investment using modern online trading platforms.

• Improving basis through layered strategies can enhance returns and reduce risk.

• There are no excuses for not learning and implementing these strategies to improve investment outcomes.

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In this section, Trey Lockerbie and Tom Sosnoff discuss the concept of reducing risk by adding a vertical to a naked put strategy.

Adding a Vertical to Reduce Risk

• By adding a vertical to a naked put strategy, you can lower the risk.

• Lowering your cost basis in a trade means giving up some upside potential.

• The probability of profit can be improved by adjusting the risk-reward ratio.

• Different strategies are appropriate for different implied volatility conditions.

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In this section, Trey Lockerbie and Tom Sosnoff discuss how improving the probability of profit affects potential returns.

Improving Probability of Profit

• Lowering your cost basis improves the probability of profit.

• A 60/40 probability of profit allows for a 20% return.

• Some traders may aim for higher returns but face greater risks.

• Outliers who make significant profits are rare, while most traders struggle to make money.

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In this section, Trey Lockerbie and Tom Sosnoff explore options strategies that allow for making money in various market conditions.

Making Money in Any Market Condition

• Options provide opportunities to make money whether the market goes up, down, or stays stagnant.

• An iron condor is an options strategy used when expecting little movement in the market.

• Different strategies are suitable for different implied volatility conditions.

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In this section, Trey Lockerbie and Tom Sosnoff discuss calendar strategies and their application based on implied volatility.

Calendar Strategies and Implied Volatility

• Calendar strategies are suitable for specific implied volatility conditions.

• Horizontal strategies involve trading options with different expiration dates.

• Understanding volatility and its impact on options is crucial for successful trading.

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In this section, Trey Lockerbie and Tom Sosnoff emphasize the importance of empowering individuals to manage their own money.

Empowering Individuals in Financial Decision-Making

• Online brokerages should provide customers with the ability to make their own investment decisions.

• The shift towards active investing from passive investing is a positive movement.

• Managing one's own money improves decision-making skills and reduces reliance on third parties.

The transcript provided was already in English.

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In this section, Tom Sosnoff discusses two important concepts that he has learned over the last 10 years: the importance of trading small and often, and managing positions at 21 days.

Trade Small, Trade Often (22:35 - 23:22)

• Trading small and often allows for better risk control.

• By staying small, you effectively manage your risk.

• Trading often creates a portfolio based on the law of large numbers rather than subjective analysis.

Managing Positions at 21 Days (23:22 - 24:26)

• Managing positions at 21 days instead of waiting until the last 21 days is crucial.

• Moving positions to the next spot at 21 days helps improve overall performance.

• Rolling positions forward every 21 days has significantly improved their trading approach.

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In this section, Trey Lockerbie asks Tom Sosnoff about the net return basis of trading small and often. They also discuss the concern of taxes and how it affects decision-making.

Net Return Basis and Taxes (24:47 - 25:51)

• The concern for net return basis is negligible as commissions are low nowadays.

• Tom Sosnoff doesn't worry about taxes as they are relatively manageable.

• Some trades may be eligible for tax benefits under the 1256B category.

Capital Requirements and Risk Perception (25:51 - 26:23)

• Selling options requires locking up a portion of capital as an escrow to cover potential losses.

• This strategy may be more relevant to investors with larger pools of capital due to premium size considerations.

• Unrealized gains or losses can cause anxiety for newer investors who are not accustomed to mark-to-market valuation.

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In this section, Tom Sosnoff discusses how trading helps people develop a different mindset towards risk acceptance. He also emphasizes the importance of learning and understanding market dynamics.

Acceptance of Risk and Market Efficiency (26:23 - 27:11)

• Trading brings people into a different state of mind regarding risk acceptance.

• Mark-to-market valuation is not something most people are used to, but it helps in understanding market dynamics.

• The efficient market disseminates prices, and trading allows individuals to learn and adapt.

Passive Investing vs. Active Learning (27:11 - 27:59)

• Passive investing without actively monitoring the market delivers zero learning opportunities.

• Understanding how investments work and being involved in the process is crucial for long-term success.

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In this section, Trey Lockerbie raises concerns about the risk perception of newer investors due to unrealized gains or losses. Tom Sosnoff shares his perspective on managing risks and advises on approaching them.

Managing Risks and Investor Perspective (25:47 - 26:23)

• Most people are barely comfortable with risks because they are not used to mark-to-market valuation.

• Comparing it to other assets like real estate, where daily price fluctuations are not visible, can help put things into perspective.

• Learning to accept risks is essential for becoming a successful investor.

Advice for Approaching Risks (26:23 - 27:11)

• It's important to understand that trading involves risks, but it also provides opportunities for growth.

• Newer investors should focus on learning and gaining experience rather than being overly concerned about short-term fluctuations.

• Developing a long-term perspective and staying informed will help navigate through market uncertainties.

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In this section, the speaker emphasizes the importance of gaining experience and actively investing in order to be better prepared for future challenges.

Importance of Experience

• The speaker criticizes passive investing, stating that it doesn't lead to learning or knowledge.

• Active investors who have experienced various situations are better prepared for future challenges.

• Lack of experience prevents people from reaching higher levels in their investment journey.

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This section discusses the influx of new money into trading platforms like Robinhood and highlights the time and attention required for active trading.

New Money in Trading

• There is a significant increase in options volume, indicating a rise in new traders.

• Active traders are retiring individuals who are learning about options as a new strategy to manage their own money.

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The speaker talks about the diverse demographic appeal of TastyTrade and shares his positive outlook on everyone getting into trading.

Appeal to Different Demographics

• TastyTrade appeals to various demographics, including Robinhood-type traders.

• Losing money through passive investments has not hindered the speaker's success; instead, it has made him smarter.

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The speaker reflects on his failures and how they have contributed to his growth as an investor.

Learning from Failures

• All active investments over 40 years have been successful, while passive investments have been losers. However, the speaker values the lessons learned from those losses.

• The speaker engages in a variety of trades, including scalps (quick in-and-out trades) and swing trades.

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The speaker explains his trading style and how he enjoys actively participating in the market.

Trading Style

• The speaker describes engaging in multiple types of trades throughout the day, such as opening, closing, adjusting positions, scalping, and swing trading.

• He clarifies that he trades small and treats it as a fun activity rather than solely focusing on volume.

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The speaker expresses his passion for trading and addresses whether active trading is feasible for individuals with other day jobs.

Feasibility of Active Trading

• Despite having a day job as a CEO, the speaker manages to actively trade by dedicating time after hosting a show.

• He believes that anyone can engage in active trading while balancing other responsibilities.

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The speaker discusses Warren Buffett's use of options strategies and shares his thoughts on adopting similar approaches.

Warren Buffett's Strategies

• Although the speaker admires Warren Buffett as an interesting and decent person, he has not adopted any specific strategies based on Buffett's approach.

• He speculates that Buffett likely uses derivative strategies like selling puts to enter long positions.

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In this section, Tom Sosnoff discusses the influence of successful investors like Warren Buffett and Charlie Munger. He emphasizes that while their achievements are remarkable, it may not be practical to replicate their strategies.

Staying Small and Trading Often

• Tom Sosnoff suggests staying small and trading often.

• The size of trades depends on the account size, typically ranging from 1% to 3% for average-sized accounts.

• Larger accounts may allocate a fraction of a percent to 1% or 2% per trade.

• Tom rarely takes positions larger than 5%.

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Trey Lockerbie asks about the relationship between options trading and wealth creation compared to other investment strategies.

Wealth Creation in Options Trading

• Trey mentions that option traders are not commonly seen among the wealthiest individuals listed in Forbes.

• Tom highlights that many billionaires have made their fortunes through options trading, such as Ken Griffin (Citadel), Tom Peterffy (Interactive Brokers), and individuals from Susquehanna.

• He believes there is significant wealth creation potential in options trading, futures trading, and cryptocurrency.

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Trey Lockerbie questions whether derivatives will play a significant role in the crypto market and if Tom would be interested in that market.

Derivatives in Crypto Market

• Tom expresses his belief that derivatives will have a massive impact on the digital asset space.

• He anticipates that derivatives will be crucial for capital efficiency across various markets.

• Tom is bullish on derivatives in markets yet to be exposed to them.

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Trey Lockerbie asks about the tools used by Tom Sosnoff for trading.

Trading Tools

• Tom does not rely on technical analysis or charts.

• He focuses on statistics, probabilities, and mathematical models.

• Tom has no interest in fundamentals, news, or other people's opinions.

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Trey Lockerbie asks about the concept of reversion to the mean in price and implied volatility.

Reversion to the Mean

• Tom dismisses the idea of reversion to the mean in price but acknowledges its relevance in implied volatility.

• He considers markets as random and follows an efficient market theory approach.

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Trey Lockerbie questions whether risk premiums and options will continue to decrease based on the structure of the VIX.

Risk Premiums and Options

• Tom explains that risk premiums and options are relative rather than absolute.

• While some ETFs may consistently decrease due to contango, the VIX itself has a floor that won't go lower.

• However, buying VIX options can be costly due to high carrying costs.

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Trey Lockerbie asks how Tom Sosnoff evaluates earnings when trading.

Evaluating Earnings

• Tom bases his evaluation on expected moves and implied volatility rank.

• He looks for high implied volatility rank and considers expected moves rather than focusing on company fundamentals or news.

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Tom Sosnoff discusses the number of trades he made and the underlying assets involved.

Number of Trades and Underlying Assets

• Tom Sosnoff mentions that they have built the trading platform to accommodate their trading strategies.

• Trey Lockerbie asks about the number of underlying assets involved in the 100 trades made that day.

• Tom Sosnoff takes a moment to count and confirms that there were 30 different underlying assets traded.

• Trey Lockerbie asks if this range of 30 is typical for their watchlist, to which Tom Sosnoff responds that it usually ranges from 20 to 40 per day.

• Tom Sosnoff explains that he trades anything that is liquid, mentioning specific examples such as future options, Bitcoin, Ethereum, stocks like Garmin and Tesla, and commodities like Natural Gas and crude oil.

• He emphasizes that he doesn't care about the name or product; liquidity and implied volatility are more important factors for him.

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Tom Sosnoff talks about his current activities after selling his company.

Future Plans

• Tom Sosnoff states that he is still running his company and has plans for global expansion and digital asset projects.

• He mentions being a shareholder in the new public company based in the UK.

• While he will continue investing and getting involved in different things, he expresses contentment with his current role at TastyTrade.

• He loves what he does, enjoys hosting TastyTrade shows, building technology, and trading. Retirement is not on his agenda.

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Tom Sosnoff shares his passion for inspiring others in the financial industry.

Passion for Inspiring Others

• Tom Sosnoff expresses his enthusiasm for talking about trading and inspiring others in the financial industry.

• He mentions how it excites him when his discussions inspire someone or get them excited about the business.

• Tom Sosnoff believes that the next generation, like Trey Lockerbie, will carry the torch forward and take the industry to new heights.

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Tom Sosnoff provides information on where to find more about him and TastyTrade.

Where to Learn More

• Tom Sosnoff informs that he is on-air every morning on TastyTrade, which is now the largest digital financial network globally.

• He directs viewers to visit tastytrade.com for free content, including archives of their shows.

• Tom Sosnoff's daily show runs from 7:00 AM Central Time to 10:00 AM Central Time, with an additional segment in the afternoon.

• He also mentions their software platform, Tastyworks, which offers stock options, futures, futures options, and crypto trading. The software can be downloaded from Tastyworks' website.

Conclusion

In this interview transcript with Tom Sosnoff, key topics discussed include the number of trades made and underlying assets involved in his trading strategies. Additionally, he shares insights into his future plans after selling his company and emphasizes his passion for inspiring others in the financial industry. Viewers are directed to tastytrade.com for free content and Tastyworks for their comprehensive trading platform.