395 TIP. Option Strategies and Building a Billion Dollar Business w/ Tom Sosnoff

395 TIP. Option Strategies and Building a Billion Dollar Business w/ Tom Sosnoff

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Trey Lockerbie (01:36): Welcome to The Investor’s Podcast. I’m your host, Trey Lockerbie. And today I am so honored to have on the show, Mr. Tom Sosnoff.

Welcome to the show. Tom Sosnoff (01:45): Thanks, Trey. Great to be here.

Trey Lockerbie (01:47): Well, I’m really excited to have you because I’ve been a longtime fan of yours. And in fact, you were largely responsible for me getting interested in investing early on. I went down the rabbit hole quite a bit on the whole advanced options strategies.

I’ve had my own journey and some of that might come to light today, and I’m really eager to talk to you and discuss a few strategies. Some of which might not be known to a lot of our investor base, and I’m really excited to dig in on all of that. But before we do that, I wanted to just briefly touch on the fact that you are a breathtaking entrepreneur.

Trey Lockerbie (02:18): I mean your own journey besides trading has been incredible, First with the ThinkOrSwim platform, now with this billion-dollar acquisition of TastyTrade. So since we study billionaires on the show and you sold this company for a billion dollars, I have to ask you this question, which is, what’d you do to celebrate? Tom Sosnoff (02:35): Nothing. Absolutely nothing. We have like a no high-fives rules, so honestly, I don’t think I did anything. Trey Lockerbie (02:48): I respect that answer and it’s funny because I feel like while you’re going through the entrepreneurial journey, sometimes you build up those big moments in your mind, but then once they happen, you’re just like, “Yeah. Right.

This is business as usual. Time to carry on.” Tom Sosnoff (03:01): It’s 100% business as usual. The crazy thing is I don’t even think about it.

It’s not even part of… None of it even bases me or doesn’t even ring a bell, like nothing. It’s just like, “Okay, let’s go. Let’s move on. What’s next?” Trey Lockerbie (03:18): Now, have you always been like that? I’m curious because having maybe a little bit of time to reflect on some of your successes, have you had a chance to distill down maybe a few of the core tenets that you feel have really led you to the success you’ve had? Tom Sosnoff (03:35): You feel a little uncomfortable talking about yourself sometimes in those ways because it’s like, in hindsight you want to say, “Oh man, I was really good at this or that.” But the reality of it when it’s happening is you’re shooting from the hip and you’re not even sure what you’re good at or what you’re really bad at. I mean, I like to say the thing that we do recognize that we are really good at is just taking risks.

There’s a strong belief in what we’re doing and taking the risk to pull it off, it’s really hard. Like I don’t worry about losing, so that’s it. Trey Lockerbie (04:13): Leap and the net will appear mindset. Tom Sosnoff (04:17): Yeah.

A little bit. I mean, you’re not even worried if there’s a net there. I mean, I guess at some different points in my career, I probably was worried, but I don’t worry about that anymore.

Like it’s not part of the equation. Trey Lockerbie (04:30): Well, interesting. I wonder if the TastyTrade success has anything to do… I’m sure it has a lot to do with the fact that the brand was very authentic. I mean, this is one of your second or third successes. So I feel like it was almost a passion project perhaps for you and therefore the tone and the brand were very authentic.

It wasn’t too polished. It was a little bit quirky. It is. Still to this day, it’s running obviously still, but the days I started watching it, it had some fun music and funny programming. Maybe talk to us a little bit about that. Tom Sosnoff (05:00): Well, we haven’t changed that.

We had an idea of what we wanted to do. We weren’t really sure what we were doing, but we had an idea of what we thought financial content should look and sound like and we knew it wasn’t what was currently out there. I knew we were not building another CNBC or another Bloomberg. We wanted there to be a connection between the personalities and between the snarkiness and the sarcasm. Because when you think about the trading business, it’s a combination of a certain amount of smarts and a certain amount of locker room antics. It’s a little bit of everything and I’m not saying that every business to a certain extent isn’t, but we just felt like we wanted to create a big playground and engage people and I think that’s ultimately what we did.

The only way we know how to create a playground is through being silly and having some fun with it. Trey Lockerbie (05:57): Was it kind of a scratch-your-own-itch approach there with the ethos of the company, or just bring your own personality to it. Tom Sosnoff (06:06): To a certain extent, every startup is, but I think that we were very confident in our know-how specifically in our know-how of the space we were in.

So we were confident in ultimately the foundation of what we were building. We just weren’t sure exactly how it was all going to work, but we didn’t know how ThinkOrSwim was going to work either when we first started. These aren’t very typical growing pains for any small startup, any new startup. I mean, the only thing I would say differently is that when we built tasty, our expectations were different. Tom Sosnoff (06:39): Like when we built ThinkOrSwim 20 some odd years ago, we were smaller time crux as I like to say to steal the Woody Allen movie thing. We were small-time crooks back in… Meaning that we didn’t really know how to think that big and the first time we had a $100 million valuation, we thought it was just like, “Wow, this is unbelievable.”

And this time when we got to a billion, we’re like, okay, that’s cool, but let’s… Do you know what I’m saying? The numbers didn’t matter anymore. It was almost like when we were floor traders. The first time you made $1,000 you’re like, “Wow that’s incredible. I killed it.” Tom Sosnoff (07:15): The first time you make 10,000 or 100,000 or 1,000,000 you’re like, “Wow, this is amazing.”

And then later on you’re like, “Who cares?” It’s like let’s just move out. Like, what’s the next thing? You set this thirst for validation for being successful, the money. I know like so many people say, money has meaning. I’m telling you the truth, the money doesn’t mean anything. It really was never part of the equation.

We just wanted to validate the hey, you know what? We want our legacy to be. We’re really good entrepreneurs and that’s it. Trey Lockerbie (07:46): Yeah. Something you said a long time ago that I heard you say stuck with me and it was something to the effect of you’d sold ThinkOrSwim and that was a huge success. You said something to the effect of, yeah a lot of people think you just retire off to a beach somewhere, but that only works for like a week, and then you get bored and it’s like… So with TastyTrade, it seems was this endeavor that was built to sell, or was the sale somewhat of a surprise getting to that echelon? Was that something that you had intended from day one? Tom Sosnoff (08:11): When we built ThinkOrSwim, we were 10 years old.

I mean, we had people that were inquiring about the firm because it was a really good firm for a couple of times throughout the years, but we really didn’t get serious office till we were 10 years old and 10 years old, we were a public company. We had three cash offices for the business. We had to take those to our board and since we lost control of the board through dilution, other things like that, we basically had to pick one of the three and we picked TD Ameritrade for a couple of different reasons. But with tasty, we never had a single person… We were outcasts.

Tom Sosnoff (08:48): I mean, not one person in 10 years, we started 2011. It wasn’t until the end of 2020 when we got the first group that was interested in us. And we hadn’t heard from a single person for 10 years before that. We were like, does anybody know how cool this business is? And we were not shopping.

We have had this for like 10 years… Theo Epstein used to say, like, “I can spend 10 years with one team, and then I got to shake it up a little bit.” I feel there’s a little bit of truth to that after 10 years especially where I am in my life. I need to shake things up a little bit. And so 10 years into this, and then at the end of right about when the pandemic started and through the beginning of 2021, we had five cash offers for TastyTrade. Five offers, solid.

Real companies with real money and the whole deal and they were all with some higher than we took. We just decided that this was the best trade for us and we were ready to do something a little bit different. So we went in that direction.

Trey Lockerbie (09:45): And trading along the way, because true to form starting this interview, you were trading right up to the start of the conversation. So it doesn’t seem like anything’s really changed. You’ve moved on, but your trades are still active and that passion is still there. Tom Sosnoff (09:57): No, no, no. I still love trading. I mean, this week I’ve averaged over 100 trades a day.

I did just under 100 trades today. I did like 120 trades yesterday. I did 100 trades on whatever it was Tuesday. No, I trade all day long. I love running the business and I love doing the show and I love building technology, but I mean, this is my life. I don’t have any hobbies.

Some people have hobbies. They paint or they travel. I don’t do anything. I just trade and work. I’m okay with that too, by the way.

I don’t feel like I need something else necessarily. I’m okay with it. I’m good in my skin.

Trey Lockerbie (10:36): I love it. Well, I want to talk about some of those… I mean, first of all, 100 trades in a day, sounds probably crazy to a lot of our listeners. I want to definitely dig in on what exactly is going on there, but we rarely cover options on this show. I’m tempted to delve into somewhat of an options one-on-one discussion, but I know that we’ve already had that conversation elsewhere. In fact, we had you on our Millennial Investing shows episode 79.

So if you’re looking for that thing, I definitely encourage folks to go listen to that if they get a little lost in the weeds here, but I’d like to address the fact that a lot of folks first learn about buying calls and puts, but talk to us a little bit about why it might be more advantageous to instead sell options. Tom Sosnoff (11:18): Well, theoretically, it’s not necessarily more advantageous to sell options than it is to buy options because theoretically, the markets are tight. They’re priced efficiently. There’s no theoretical edge. We’d like to think that there’s some kind of a mechanical edge, which essentially just means that I like to force the market to beat me rather than I’m going to try to beat the market. So I think it’s easier to sit back and let the market try to outsmart you than it is for me to try to outsmart the market.

This is a very simple game. There are only two sides. So there are only two players and so it’s not this massively complex game where there are 100 different choices or something like that. Tom Sosnoff (12:03): There are only two sides and there’s lots of strategies, but there’s only two sides.

I’ve been doing this a really long time and my preference is I want to do things that have a very high probability of profit or very high probability of success, I should say. In order to get a high probability of success, you have to have unlimited losses and limited profitability. That’s the simple model and it’s very hard for people to understand. The options are different, options are strategic whereas stocks and futures, things like that, and digital assets are all black and white.

So they’re static as we say, but options give you an opportunity to do something that’s a little bit different. Tom Sosnoff (12:42): You can use this strategy with limited profitability and unlimited risks, which will essentially give you a higher chance of being successful than anything else. That’s just a math model. And then I actually like that because I like to be right. It doesn’t mean you make money, just means you like to be right.

I feel like if you combine lots of wins, it’s easier to be successful in the long run than trying to hit a home run every now and then and leaving a lot of men stranded type thing. Anyway, that’s my approach. So I prefer the sell-side and the short premium side, and it tends to work for me. Trey Lockerbie (13:17): So talking about the selling side, one of the strategies that’s often talked about is the selling of naked puts, and this is a very popular approach. Walk us through the appeal of why you would sell something like a naked put. Tom Sosnoff (13:31): It has the highest statistical chance of success of any strategy.

Markets have what they call positive drift embedded in them. That just means that markets have a small drift to the upside because it’s how you get paid over risk-free rates. So if you think, “Hey, I could put my money in XYZ risk-free and I can earn, let’s say a few basis points right now.” Well, if you’re going to invest in the stock market and you take risks, you deserve to make more than a few basis points because you’re taking risks. So we call that positive drift.

Tom Sosnoff (14:02): So the concept of selling puts is you sell something that is expensive, that has a very high probability of success. And even though it has limited profitability, it generally works overtime, generally. That’s the whole thing behind selling puts.

I mean, some people like to say puts or schmutz. Other people like to say, hey, you know what? It is the most successful strategy over a long period of time because the market has a positive drift and stocks like to go higher, that’s all there is to it. Trey Lockerbie (14:33): Interesting.

So what are the key advantages, in your opinion, of doing something like that instead of just buying the stock if you’re bullish on it? Tom Sosnoff (14:40): Higher probability of profit. So if you buy a stock and you’re bullish on it, it’s basically a 50/50 shot. If you sell it out of the money put, you have limited profitability, but you probably have an 80% chance of being right. So people like the 80% chance of being right more than they like the unlimited profitability. I mean, there are people that like unlimited profitability.

I’m just one of those people that like an 80% chance of being right. Trey Lockerbie (15:02): You’re capping your profits to get a higher probability of success. Tom Sosnoff (15:06): You’re giving up your unlimited profitability in return for a much higher probability profit. That’s all it is. Trey Lockerbie (15:12): Interesting.

Well, with that positive drift sometimes comes low volatility. And as I understand it, option pricing, I mean, options have more meat on the bone, should we say, if there’s more volatility? So one crucial concept to understand with options is that the pricing revolves around this thing called implied volatility. So is that simply a metric for risk or is it something more? Tom Sosnoff (15:37): It’s a metric. It is a fear metric, but essentially implied volatility is another word for expected move.

And yes, in a perfect world, if you got to choose the perfect time, you would sell implied volatility when it’s high, as opposed to when it’s low. And so you usually get high implied volatility in down moves. So if the market is going down or it’s pulling back or whatever you want to say, and volatile is expanding, usually have the perfect scenario for selling puts, which is low basis, high implied volatility. A low base just means a low price.

So low price, high implied volatility. Sure. It’s the perfect world.

Trey Lockerbie (16:12): So I want to talk about the idea of layering these strategies on top of a buy and hold type portfolio because I think this is where things get really interesting and it might be a little bit difficult to grasp some of these concepts upon first listen, but talk to us about the advantages of layering strategies. I like to start with what you would call a vertical. So talk to us about that and why you might include something like that in the portfolio. Tom Sosnoff (16:34): Well, first of all, it’s totally fine.

In 2021 now, online trend technology is so good and the product accessibility is amazing. So you can basically trade anything from a single platform. It doesn’t matter what it is.

And so there’s no excuse for not learning what you can do and layering anything on top of any static investment. If you’re proving your basis or giving yourself a chance to improve your basis, I mean, why wouldn’t everybody do that? Do you know what I’m saying? It doesn’t make any sense. Why not? So I love the idea of, in fact, I don’t know why anybody that has a static investment unless you’re not allowed to trade something else, it wouldn’t trade something else. It doesn’t make any sense to me.

Tom Sosnoff (17:17): If you had a chance to sell a call on anything that you own, it was a liquid marketplace, you do it. I mean, what do you care if it gets called away? I mean, unless it’s your kids or something who cares? Trey Lockerbie (17:28): So if we go back to selling something like a naked put where you’re collecting some of that premium, but you do have some risks. So by adding something like a vertical, you’re just lowering the risk a little bit more as I understand it because you’re capping the losses as well as capping the profits. Tom Sosnoff (17:43): Yeah. I mean, when you lower your basis, every time you prove your position, you have to give something up.

If you’re improving your basis or lowering your cost basis, you’re obviously going to have to give up some upside, but at the same time, you’re taking your 50/50 bet and you’re making it 60/40 your way. That’s all it is. So if you gave people the choice and you said here’s a bottle of water, you can buy it for a dollar and it’s a 50/50, so up or down, or here’s a bottle of water and you can buy it for 80 cents. It’s worth a dollar but you can buy it for 80 cents, but you can only go to $1.20.

Tom Sosnoff (18:18): So most people would say, well, that’s a 20% return and obviously, in this case, I have an 80%, my probability of profit has improved by 20% over where it was before. So I have a 60%. If 60/40 is my probability of profit and I can make 20% on it while I do that.

And some people will go, I think this one’s going to be three dollars. I don’t want to cap myself at 20%. I think it’s going to make 200% or 300%. I mean, those are the people that sometimes there’s a few of those outliers that get really rich and most of them don’t make any money, but who knows? Trey Lockerbie (18:51): One of the things that intrigued me the most about options when I first learned about them was that it was sold to me like this idea of, “Hey, now you can make money in the stock market whether the stock market is going higher, whether it’s going lower or whether it’s just staying stagnant.”

So if we take the idea like a vertical of selling and buying a put under a certain index or stock or whatever, and then also doing that above this price as well, you get something called an iron condor. As I understand it, this strategy is best used when you think something’s going stagnant. Tom Sosnoff (19:24): Yeah.

There are lots of strategies when you think like nothing’s going to happen, you can sell an iron condor or you can sell a strangle. There are lots of different approaches to use. I mean, the beautiful thing about option strategies is it’s the same general ingredients used to make lots of different food with the same ingredients. Trey Lockerbie (19:40): Well, one of the other concepts that have been hard for me to wrap my head around is something like a calendar strategy and how or when to use something like that. Tom Sosnoff (19:48): Different strategies are appropriate for different implied volatility conditions.

So like for example, you might use an iron condor if implied volatility is really high because you’re selling something that’s rich and hoping it just sits right there. A calendar or any horizontal strategy, you’re over multiple months. You’re hoping that that really expands so the back-month premium that you’re buying will go up. You just have to a little bit just think through how you want to play this volatility wise and that’s essentially… Those are the mechanics that we basically teach every day on tasty. And we review them to death.

Like we have mechanics for everything. Tom Sosnoff (20:27): Every level of volatility, every level applied volatility, every level of implied volatility rank, which is the ability to measure it against itself, every level of price, you know what I mean? Every level of S&P volatility. I mean, it’s all part of the concept of when you build a platform around fear. One of the reasons I think we’re successful is I don’t view the online brokerage business the same way other CEOs do. I view the online brokerage business as it is our obligation to present you, the customer, with the ability to do whatever it is that you want to do.

As my job is to facilitate the opportunity for you and I don’t care what that means. Tom Sosnoff (21:08): So for one person, it means one thing for somebody else, something else who cares? We’re here, you are a really good online broker and a really good content provider. Writes content, researches, content, and builds technology, it basically allows the person that’s using that content or use that technology to do whatever they want to do, because I believe those decisions should be made by the individual, not by some third party. How are going back to the individual… Just like sometimes there are these huge movements in the world. Right now, there’s a lot of leverage going back to the labor force, which has always been on the management side. It’s now going back to the labor side, which is cool.

Tom Sosnoff (21:46): There’s also this big swing of passive investing, moving towards active investing and I think it’s really healthy. Part of it was the mean stock explosion and part of it’s what you’re continuing to see now with digital assets, space exploding, and other things like that. It’s a very important, very powerful movement that will over time engage and empower individuals to manage their own money and it’s critical.

And not paying somebody else to do things for you that you could learn how to do and at the same time, improve your decision-making skills is critical. Trey Lockerbie (22:16): When you touched on having mechanicals for everything, and I’ve noticed that about TastyTrade, you use it as this amazing platform for research and you share the results very often. And so I’m curious what have been some of the most surprising discoveries for you and the research you’ve done, especially around maybe the timing of your options strategies.

Tom Sosnoff (22:35): In my mind, I’m not gonna say single. There are two things that we’ve learned over the last 10 years that blow me away because I missed them for the other 30 years of my career. One is the concept of trade, small trade often, a basic law of large numbers and understanding that really the only way to define and measure and control your risk is an order entry. So if you stay small, you effectively do all your risk controls by staying small. And then by trading often, you put yourself in a position where you are essentially creating a portfolio based on the law of large numbers instead of a portfolio based on something subjective, like technical or fundamental analysis or anything else.

And so I really believe that trade small trade often critical. Tom Sosnoff (23:22): That’s one. The second thing is as far as mechanics go, managing positions at 21 days, as opposed to leaving them into the last 21 days, which is the negative part of the decay curve for us and managing those positions earlier.

So at 21 days, basically moving things out to the next spot. Like tomorrow is 21 days till November expiration. So we’ll roll to December. And to me that 21-day management has really been the key to significantly improving what we do.

Trey Lockerbie (23:54): On that last point, what is the target for getting into the position? How many days do you typically [crosstalk 00:23:59] Tom Sosnoff (23:58): 45. Yeah, I mean, you can use any, but 45 is up. Trey Lockerbie (24:03): And you found that at 21 you get sort of diminishing returns or at least more at risk, potentially? Tom Sosnoff (24:08): 45 to 21. It’s a beautiful world. Put him on a 45, roll him forward 21, move on to the next trade.

We never really understood that until we started to do… I mean, Tasty’s essentially a think tank. So until we started doing all that research, never really made any sense. Now we feel good about it. Trey Lockerbie (24:26): And on the trade small trade-off in peace, what I’m curious about is what does that look like on a net return basis? Once you factor in the taxes from those profits and trading, I mean, commissions are negligible nowadays, I think, but how do you factor that into the equation or how much of that is a concern or drives the decision-making? Tom Sosnoff (24:47): Zero.

I mean, I can’t worry about taxes. I can’t worry about that stuff. I can’t worry about stuff I can’t control.

I mean, the numbers are relatively… It depends. Most are short-term. Some are 1256B eligible, which has a max of 28%, but generally, I don’t worry about taxes. That’s not my… That’s like saying, I don’t worry about taxes in anything I do. Like if I build a business, I’m not sitting here wondering, oh my gosh, what’s my tax liability going to be? It is what it is. I move on.

Trey Lockerbie (25:18): Am I right to remember that… I think that there’s some tax benefit of doing options on indexes or indices rather than… Tom Sosnoff (25:25): That’s the 1256B. Trey Lockerbie (25:26): That’s the 1256B. Tom Sosnoff (25:27): Max 60/40 split of long-term short-term, that’s all that is. Trey Lockerbie (25:32): Got it.

Something that I think a lot of folks miss is that although you’re selling something like a put and collecting that premium, you’re actually locking up a large proportion of capital is essentially an escrow to make sure that you can cover your basis if the trade goes south. Tom Sosnoff (25:47): In regular margin accounts about 20%. Trey Lockerbie (25:51): 20%. So this tends to make these strategies, in my opinion, sometimes only relevant to people who have large pools of capital since the premiums need to be large enough to not only allow a good yield but the taxes and the things we just talked about. I’m wondering if mainly what I’ve seen is this risk of these unrealized gains or losses affecting newer investors when they see the numbers swinging wildly sometimes, and they have all that money locked up, it can be pretty anxiety-inducing for some. So how do you advise people to approach the risks? Tom Sosnoff (26:23): Most people are actually barely comfortable with the risk.

Most people aren’t used to seeing things mark to market. I mean, imagine if your house or your condo, whatever it is, and it had a running ticker on it. If the market was down 5%, you’re like, “Oh my God, my half a million-dollar house just lost $25,000 and I can’t believe it.

Now, what am I going to do?” Like, you’d go crazy. I will argue that what trading does is it actually brings people into a completely different state of mind with respect to an acceptance of risk. They’re just not used to things mark to market.

I mean, imagine if we showed your running ticker on your car, how much it’s appreciated every day. To me, that argument makes no sense because this is the most efficient market in the world and all we’re doing is just disseminating prices. Tom Sosnoff (27:11): So you have to learn at some point. The problem that most people have is that they’ll give their money to some money manager or some passive investment and at some point there’ll be up against some money, which is great. At some point, there’ll be down some money and they really don’t understand it or care because they don’t really know how it works and they don’t have to watch it every single day. To me, that makes absolutely no sense because the learning process delivers zero.

There are no takeaways. I mean, let’s say you invest your money passively and after 10 years you made it, let’s just say, you put your money passively away and the average passive return over time is like 5%, 7%, whatever it is. Let’s say you make 10% a year over 10 years. Tom Sosnoff (27:52): So at the end of 10 years, you look at your money you go, “Wow, that’s a pretty good return, but now where are you? You don’t know jack.

You’ve learned absolutely nothing. All you’ve got is twice the money that you had when you first started, but you haven’t learned anything else. You don’t actually know anything. And the other person that did all their own investing, maybe they’re up half as much. Maybe they made nothing. Maybe they made three times as much.

I have no idea, but what I do know is they are far better prepared for everything else they’re about to address in the rest of their life than the person that passively invests. Tom Sosnoff (28:25): So I’m going to argue that in order to win, you have to experience things. If you don’t experience things, it’s impossible to get to another level. I really believe that most people don’t ever get to that level because they don’t get a chance to experience these things.

Trey Lockerbie (28:42): There’s been a lot of talk of this rush into things like Robin Hood and a lot of these millennial Gen Z-type crowd. I even read I think earlier this week, that half of the options volume on Monday, I think it was in Tesla. There’s a large amount of new money coming into that way, but I think what’s not often talked about is that what you just described.

It takes a lot of time and attention to do 100 plus trades a day that there are people on the other side who are retiring, who don’t have that day job anymore, who are learning things like options and maybe trying to implement that as a new hobby or new strategy to manage their own money. I’m curious, on the TastyTrade demographics, have you seen anything like that where there’s a certain level of interest, or is it all across the board? Tom Sosnoff (29:22): All across the board. It’s not anything specific. I mean, we don’t appeal directly to the Robin Hood demographic, but we do have plenty of Robin Hood-type traders. We’re pretty much across the board appeal to every demographic. I’m all for everybody getting into trading.

If you asked me what the downside is, I mean, I couldn’t even tell you. I mean, of course, you can lose money. Who cares? If you tell me I’ve lost money on 30 or 40 passive investments I’ve made privately over the last 30 years, I don’t think I’ve ever cashed a single check and it’s only helped me.

It doesn’t hurt me at all. Maybe into a better entrepreneur made me realize, oh my God, these people I thought knew something, they didn’t know anything. Tom Sosnoff (30:01): I’m just saying, I don’t look at any of my failures as things that have slowed me down or deterred me or changed my path or anything like that and I don’t even know if we would have been successful without all those failures and all those horrible investments and all of them were passing by the way. All the active investing I’ve done for 40 years have been great. All the passive investing I’ve done has been complete losers and yet I value those losers.

They’ve made me smarter. Trey Lockerbie (30:26): Well, when you talked about 100 trades in the day, which I keep going back to because I find it amazing, are these trades that are on… You mentioned the 45 days down to 21 is the magic number, but to do that level of volume, are we talking about you’re staying in traits for minutes or hours? Tom Sosnoff (30:41): A lot of new trades, a lot of closing trades, opening, closing, adjusting. I do a lot of adjusting, tweaking my position all day long. A bunch of scalps, some swing trades. Trey Lockerbie (30:51): I got to ask, what’s a scalp? Tom Sosnoff (30:53): In and out like this morning, the first trade I made today was selling some Tesla stock and covering $10 lower. That stuff.

That’s the stuff that turns me on. I like it. Trey Lockerbie (31:03): So you’re the guy who has 50% of the volume of Tesla [crosstalk 00:31:07] as we speak? Tom Sosnoff (31:06): No, no, no.

I’ve traded small. Having some fun, trade small. It’s great.

It’s just like having some fun, buying and selling some futures, just playing. It’s just a big playground for me. I literally have been playing in this playground now for 40 years. Every single day, the bell goes off in the morning, I love it. We play until the end of the day and that’s it. Trey Lockerbie (31:28): Is that feasible for folks who have other day jobs though, that don’t have the same time and attention during the market? Tom Sosnoff (31:35): Sure.

I do it. I have a day job. I’m a CEO of a billion-dollar company. I mean, I have a day job. Of course, I can do a show for three and a half hours a day.

I got to run a company after that. I mean, yeah, sure, of course. Trey Lockerbie (31:48): Can’t argue with that.

So we study people like Warren Buffett on the show quite a bit, and we’ve never really talked about his options strategies, but he has some, and the fact that he even has a track record of including some options into his strategies might even surprise people but have you learned anything or adopted any strategies based on how someone like Buffett has structured his trades? Tom Sosnoff (32:10): No. I mean, I think I like Warren Buffett because although I don’t know anything about him other than whatever I’ve read commercially or whatever kitschy, little thing we’ve seen over the years. He seems like a very interesting, decent man.

That’s how I would describe him. I’m sure he uses some derivative strategies, mostly probably selling puts to get long. I’ve heard of some of his trades through the grapevine over the years, but I don’t necessarily… I mean, I would argue that Warren Buffett is obviously an outlier of massive proportions, but at the same time, I would probably argue that in today’s world, he’s an average investor.

He is what he is. He’s an outlier. He’s an amazing outlier and what he’s done in his career is incredible, but I wouldn’t look at him today or Charlie Munger or any of those guys and say, well, I want to do what they do. Like it doesn’t mean anything.

Trey Lockerbie (33:02): Interesting. When you were talking about staying small and trading often, what size are we really talking about? I’ve heard some people on the long side go up to save 10% of their portfolio if they’re going long on something. But if we’re trading, are we talking like fractions of a percent on an allocation basis? Tom Sosnoff (33:19): It’s not big. It depends on how big your account is, but if your account size is relatively… If your account size is average, let’s say 50,000 to 100,000 in that range, it could be anywhere from 1% to 3%.

If your account size is larger, it could be anywhere from a fraction of a percent to 1% or 2%. It really depends, but we almost never get bigger than 5% for me would be a huge position. I don’t go there.

Trey Lockerbie (33:46): Well, the reason I bring a Buffett, et cetera, is that one thing when I was speaking to somebody very early on learning about options, they highlighted that if you look at something like the Forbes 100, and the billionaires in the list, you don’t often see option traders up there in the highest ranks because there’s something about compounding capital and leaving it alone, it seems like. And even for yourself selling a billion-dollar company, that’s a large amount of value that came from you compounding this business for 10 years. I’m just curious, is there something just that should be respected about the sport and the fun of it versus the wealth-building aspect of it or is this like your go-to strategy for wealth creation? Tom Sosnoff (34:26): Well, the richest person in Illinois is Ken Griffin who owns Citadel. Basically, they made all their money selling options. The richest person in Florida is Tom Peterffy and he’s made all his money owning interactive brokers and basically trading options.

The richest person in Pennsylvania, I think it’s guys from Susquehanna. I mean, I think I’d be really careful. That’s only three states and those are the three richest people in those states. This is a relatively new industry. So this is not like old money but I think this is outside of crypto because there’s a lot of very interesting new crypto zillionaires. But when you look at the financial service world, I would say that in the modern era, they’re either all the wealth has been created for any option side, the future side, or the crypto side.

I don’t think it’s the stock side. Trey Lockerbie (35:23): Interesting. Do you think that if derivatives start forming more and more on the crypto side or even the web three NFT side of things, would you be interested in that market et cetera? Tom Sosnoff (35:35): Of course, I think it’s going to be massive. I think the derivatives on the digital asset space are going to be huge. I have no reason to think that we won’t be knee-deep and head first into it. I think the derivatives on everything.

Derivatives are capital efficient and underlying without derivatives, cash markets are not capital efficient. There’s going to be no marketplace that survives long-term without capital efficiency. So, no, I’m very bullish on the derivative space and on all the markets that haven’t been exposed to derivatives yet. Trey Lockerbie (36:05): Very interesting. One other question I had around the trading is what tools do you like to use? If I remember there are Bollinger Bands, things like that come to mind as far as trying to find… No, you’re shaking your head as far as… Tom Sosnoff (36:16): No.

I’m not a technician. I don’t use any charts or technical analysis. None of it. No real traders do. I mean, that was always the public way of thinking about we got to look at a chart and see what’s going on, but there’s no such fundamental… I look at statistics probabilities, I look at the math, I have zero interest in fundamentals, no news, no company fundamentals, no interest in hearing what anybody else has to say, and zero interest in technical analysis. Trey Lockerbie (36:44): Amazing.

So if we’re looking at price, are we talking about reversion to the mean? Tom Sosnoff (36:48): There’s no such thing as a reversion to the mean and price. There’s no support for it in the math world, but there is support for reversion to the mean in implied volatility. So we do look for reversions to the mean in implied volatility, but everything else, we treat the markets as being… I’m an efficient market theorist choosing markets as being random. Trey Lockerbie (37:04): With the implied volatility, I think about the VIX a lot and how it’s destined to keep going lower and lower based on the way it’s structured does that mean that risk premiums and options will ever go lower and lower, or is it all just relative? Tom Sosnoff (37:17): No. It’s all relative.

The VIX itself, I mean, some of the ETFs that are in contango that always goes down, that’s one thing different. That’s more infrastructure, but the VIX has a floor. Whatever that floor is nine, 10, 11, 12, whatever it is. So no. It’ll never go lower, but you can’t just buy it because the cost of care is so high.

Trey Lockerbie (37:37): What about earnings? How do you typically look at earnings? Tom Sosnoff (37:40): Well, I base everything on the expected move and implied volatility rank. So I’m looking for a high implied volatility rank and then expect to move like… Like I didn’t trade Apple today because the implied volatility was too low for me and the expected move was too low, but generally, I will trade the expected move and implied volatility rank. That’s it. That’s all we do.

Trey Lockerbie (37:59): Is expected to move a proprietary calculation that exists on every platform? Tom Sosnoff (38:06): No. Well, we built it into our platforms. I don’t know what other firms have done. Trey Lockerbie (38:10): One question I have to fit in here and it is around the 100 trades you did today. How many underlying assets are we talking about with 100 traces? 100 different stocks? Is it five stocks? Tom Sosnoff (38:21): No.

How many? I can tell you. Trey Lockerbie (38:23): I’d be curious to know. Tom Sosnoff (38:24): All right, well, you’ve got to give me a second here.

We’re going to count them up for you. It looks like 30. Trey Lockerbie (38:30): 30 for today. Tom Sosnoff (38:31): Yes.

30 underlyings. Trey Lockerbie (38:34): Right. And so is that the size of your normal watch list of sorts? Is it usually 30? Is that a comfortable range or is it much broader than that? Tom Sosnoff (38:42): 20 to 40 a day? Yeah. Sure. Trey Lockerbie (38:45): Interesting.

And is it all the usual suspects or is it within a circle of competence of yours at all? Tom Sosnoff (38:49): Everything that’s liquid is in play for me. Like today, I’ll just give you… My first trade of the morning was in 10-year notes. That’s future options. Then I traded Bitcoin, Ethereum, Polkadot. Then I traded Garmin, Tesla, eBay, Shopify, Coin, Facebook, Affirm, more eBay, more Coin, Starbucks, Natural Gas, Futu, Snap, Soybeans, crude oil. I mean, that’s just to name a couple, but yeah.

I mean, I’m all over the place. I’m indifferent to products. I don’t give a crap. If it’s liquid, I don’t care what it is. The name means nothing to me.

Trey Lockerbie (39:28): It’s more about where that implied volatility and expected return. Do you filter for those numbers? Are these things [crosstalk 00:39:33] Tom Sosnoff (39:34): I do. And it’s also about liquidity. Every single thing I trade is liquid. Trey Lockerbie (39:38): The Bid-ask spread is very tight. Tom Sosnoff (39:40): Bid-ask spread’s relatively tight.

Most are liquid products. Mix it up. Yeah. Trey Lockerbie (39:46): Very cool. Well, what is next for Tom Sosnoff now that you sold your company for a billion dollars? You were shaking things up as you mentioned earlier, what’s getting you out of bed in the morning? Tom Sosnoff (39:57): Well, I’m still doing what I’ve always done. I’m running this company and we’re trying to take a global, got some digital asset plans, some cool stuff we’re building right now.

I love the space. I mean, I’m a shareholder of the new company, so we’re public and in the UK. So that’s cool.

So that’s what I’m doing right now, but I’ll be investing. I’ll be making investments. I’ll be involved in different things, but I’m pretty happy with what I’m doing right now. So I love my job.

I don’t even know if I get paid, but I love my job and I love what I do. I love doing TastyTrade, it’s the greatest show on earth. I love building technology and trading. So I’m pretty happy, but I’ll keep myself busy by challenging myself until, I mean, I’m never retiring. So I’m just going to keep doing stuff until I can’t do it anymore. Trey Lockerbie (40:50): Well, Tom, this has been a real honor to have you on our show.

I’ve been a longtime fan of yours. I’m very impressed with what you’ve built many times over. It’s really interesting and I can tell how much you love this stuff and it’s exciting.

Tom Sosnoff (41:01): You know Trey, when it all boils down to it, you just look around like, okay, this is cool. Like I would do this every afternoon and talk to people about it because if it inspires someone like you or it gets somebody else going and it lights a fuse or gets you excited about the business, it’s cool because you guys are the guys that have to… You’re the next generation. You have to carry the torch. Take it forward. Trey Lockerbie (41:21): Very cool.

Well, Tom, before I let you go, I definitely want to make sure I give you an opportunity to hand off to our audience where they can learn more about you, TastyTrade, any other endeavors that you’re working on. Tom Sosnoff (41:31): I’m on-air every morning on TastyTrade for the largest digital financial network now in the world. So tastytrade.com and we’re free. Everything’s free. The content’s free, the archives are free, everything.

So you can check out tastytrade.com. I’m on from 7:00 AM Central Time to 10:00 AM Central Time, and then from 2:30 to 3:00 in the afternoon, and that’s my daily stuff. And then if you want to see our software, which I think is the best in the world and all the technology we’ve built, it’s on Tastyworks and it’s downloadable. So you can just go to Tastyworks, you can download it and if you like our stuff you can open an account with us. Our rates are great.

Our content’s amazing, and our technology blows away everybody else. We’re the only firm that offers everything, stock options, futures, futures options, crypto. We have everything. Trey Lockerbie (42:17): Well, thank you again very much, Tom. I really appreciate it and look forward to having you on the show again soon. Tom Sosnoff (42:22): Awesome.

Thanks, Trey.

2021-11-20 10:38

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