Apr 5, 2022
Options vs Stocks & Trading vs Investing w Tom Sosnoff of tastytrade
- BRT S03 EP14 (113) 4-3-2022
Things We Learned This Week
- Implied Volatility & Time Decay – options begins with volatility, on a clock so Mechanics (forget mind set) on how to setup a trade is key
- tastytrade is a media network based on Math (Probability & Statistics - Look at the Math), trading & focus on markets
- Limited Profitability & Unlimited Risk when you Sell Puts w/ 80% chance of success - Be a Seller of Options – let Market beat you, slight edge
- Trade Small, Trade Often - Law of Large Numbers w/ 45 DTE Strike Price of 1 SD – Exit or Roll at 21 DTE
- Options Trading Teaches Life Lessons – Important to: take risks, learn to take risks, make quick decisions, be decisive about those decisions.
Guests: Tom Sosnoff of tastytrade
https://twitter.com/tastytrade
Tom Sosnoff, founder and co-CEO of tastytrade
Tom Sosnoff is an online brokerage innovator and financial educator. Tom is a serial entrepreneur who co-founded thinkorswim in 1999, tastytrade in 2011, tastyworks in 2017, helped to launch the award- winning Luckbox Magazine in 2019, and in 2020 he created the first new futures exchange in 20 years, The Small Exchange. Leveraging over 20 years of experience as a CBOE market maker, Tom is driven by the passion to educate self-directed investors. A true visionary, after his years on the floor he saw the need to build and design superior software platforms and brokerage firms that specialized in complex financial strategies. His efforts ultimately changed the way options and futures are traded and how digital financial media is produced and consumed. Currently, Tom hosts tastytrade LIVE and continues to drive innovation and know-how for the do-it-yourself investor.
Tom has been named to Techweek’s Tech 100 list, Crain’s Chicago’s Tech 50, and has spoken at over 500 events across the globe. Tom received the Ernst & Young Entrepreneur of the Year Award and was been featured by prominent publications such as WSJ, IBD, Chicago Tribune, Crain’s Chicago, Traders Magazine, and Barron’s.
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About tastytrade, Inc.
tastytrade is one of the most-watched online financial networks, engaging investors and traders across 165 countries with daily, live, cost-free and commercial-free programming with over 100 million hours viewed. tastytrade offers over 50 original segments for all levels of traders. tastytrade’s data-driven research-based content teaches a logical, mechanical approach to investing and identifying opportunities based on probability and volatility. Investors are continually challenged with financial math, humor, and new market perspectives.
tastytrade and its companies focus on empowering the individual investor through content, technology, and know-how.
tastytrade is the parent company to several innovative financial companies.
tastyworks, a brokerage firm creating and leading a financial revolution for the do-it-yourself investor
Notes:
Bio – options trading in 1980s, CBOE market maker, then built 2 co’s
tastytrade & tastyworks (broker platform), history c 2011 – media platform sold 2021, $1 billion bought by IG Group 2021, Tom stayed on, runs tastytrade.
TD Ameritrade, and 2012 purchase of Think or Swim (was IPO, public)
Partners – Tony Battista, Kristi Ross, Scott Sheridan
Think or Swim – started in 2001 w/ 7 people and 5 still with Tom.
10 years, went public, purchased by TD in 2009, $1 billion stayed 2 years, then started tastytrade with TD CEO as investor.
Think or Swim – learned as they went, education, content.
Finance is missing good content, does not understand financial media and technical analysis.
Efficient Market Theorist & efficient market pricing
Media Network all math – quantitative and statistical logic.
tastytrade 10 hours a day – live content.
Focus on markets, math related and trading. Morning radio show about people working tp make money, having fun, talks trading and Financial Mechanics
Tony Battista, Tom Preston, are some of the 30 personalities total on-air.
Talking math a lot, but Tom just ok at math.
Jacob Perlman – math genius, Phd. tastytrade research team
Audience is smart, challenge them don’t dumb it down.
Capital Efficiency - Derivative (Options) Markets very efficient.
Buffet Options Strategy – selling Puts, profit of $ billions, rarely discussed
Markets are 50/50, generally.
S/T markets are emotional, can be over bought or oversold, but Tom trusts prices over L/T. No one knows direction of market and where price is going on stocks and market direction , 50/50 is a guess. Market is random with side of emotion, not a perfect distribution curve.
Positive drift in market, market goes up over Long Term L/T
More deviations vs. a model.
Does not believe in traditional investor education
Empower power with lots of info, not teaching people
Content marketing in house, media to masses
Stocks can go down, have to experience it
Fear size (of a trade) - one thing Tom fears is size, bet big and wrong, large failure
When Genius Failed (a book) - trades too big (leverage), collapsed the company
Law of large numbers – do something enough times, end up with expectation.
Trade a lot with 70 - 80% probability outcome.
Learn options by doing options
Casino games have negative edge – can’t win, can never get ahead. Just for fun.
Options trading teaches life lessons – Important to: take risks, learn to take risks, make quick decisions, be decisive about those decisions.
Take risks to do something special
Brain processing, faster than competition
Working hard not enough
Make a lot of decisions, learn to take risk and increase brain processing speed.
Manage risk in life, finance and work probabilities, hard to predict things
Day 1 in Options – Mechanics most important thing to understand
Mindset is BS, no emotional side to trading, no mindset to math.
Mindset just a sales tool, that Financial world sells.
Mechanics has strategy within it. Cannot manage positions or risk post trade.
Need mechanics to set up trade right.
Traders could be nice or mean, but all good ones make fast decisions before you even heard question.
Trade plan – if goes this way, I will do this.
Options – learn by doing; learn mechanics by doing a little at a time.
Volatility – majority starts and ends with volatility with few exceptions.
Implied volatility & Time Decay – always on a clock, option will expire
Stock Trader - out wait your enemy, patience. Trader plays short volatility game.
Enter trade – implied volatility rank is high
Trade favorable, expected volatility move is high.
Rank relative to itself, it’s inflated and has potential to contract.
Volatility is a math equation and will mean revert.
Price is not a math equation, does not need to revert to some number or average.
Tom would rather be a seller of options vs a seller, small advantage, likelihood of contraction after expansion.
Fear has expanded, better chance to contract vs expand more.
Analogy: own stock, own the asset. Sell options, collecting income (rent) on the assets. Sell covered calls, or out of the money put.
Put – limited upside, unlimited downside, but 70% chance of profit.
Put up $200 for $100 profit with 70% chance
Put up $1000 for unlimited profit with 50/50 chance
Have a choice – think through probabilities and bank roll.
No math equation can tell you the right answers for sure.
Tom back tests – selling out of money puts of S&P index out performs buying index with dividends, Use less capital, lower volatility in your P&L, make more money.
More conservative strategy
Trade more, and small with higher percentage of success.
45 day position – DTE Days to Expiration. 21 day DTE is exit day per Tom, exit early after 24 days.
Adjust, roll or close position. Increase probability to be profitable. Reduce outlier risk almost to 0.
tastytrade spent millions on research
Manage trades and exit early is mechanics, can always exit at 21 DTE
45 day position, 24 days in (21 DTE), make a decision – adjust, roll, close, extend contract (add duration) –roll
Start new position 45DTE, buy more time at 21 DTE, move it no matter what work to be close to 50% at 21 DTE
Casino Analogy – bet $100, won $50, take money and end bet.
tastytrade content goal is: create methodology and strategies to have positive environment for self directed investor, requires time and resources.
Learning curve faster now, can learn in a few months or a few years.
6-10 strategies Tom likes, short strangle – simultaneous sale of a call and a put.
No tech analysis or charts, just watch screen.
Price Action / Liquidity – trading hundreds of millions per day.
Very liquid assets, very liquid underlyings (ir – Apple, Tesla, Indexes) does not trade non-liquid (microcap)
Tom could do 60 trades a day (had 14K trades in 2021) On day of interview, did 110 trades. Self described “Trading Junkie”
Account size in tastytrade - $25K average . Reserves – 50%, $12.5K in reserve.
1-3% of account size on a particular trade ($250 per trade), 5% on high and 1/5 size of a stock. Tom does not believe in option levels of industry.
No noise, no CNBC or Bloomberg news. No (zero) belief in newsletters or trading bots, trading education is over rated. All tastytrade content is free, videos, newsletter, etc.
Trade fees are low, $1 per, Tom does factor fees or taxes.
Most options income is ordinary income - 1256 B tax – max of 25%. L/T 40%, S/T 60%
Stocks are usually capital gains (20%) in taxes
Trades – 80% of business in under-lyings (standard big stocks / indexs)
1 STD – 16% of getting to that level, 2 STD - 5%, 3 STD – 1%
1 STD is Delta, Tom likes 16 – 22%
Greeks – know Delta & Theta (can also learn Gamma, Vega)
Directional Risk – rate of decline or time decay – Theta
Change in price of option vs. stock – Delta, premium making or losing daily.
Per Tom – need to trade more. Trade small, trade often. Counter thinking to stock trading of buy & hold. Per Tom, stock trader can evolve to an options trader with 1 downturn in market.
Buy & Hold stock investor (passive) is a ‘knuckle dragger’, does not have the appreciation for capital efficiency - Stock investor ‘just hasn’t evolved yet’ – gotten to next level.
Casino Games analogy – enter a casino, we have all these games, but you can just play the slots (buy stocks)
Grow and realize capital efficiency of options indifferent to products and strategy.
Tom owns stocks but trades options, crypto, stocks
Facilitate opportunity. No limits, no fences.
House Analogy - big meter in front of house, with home price & appreciation shown daily on the side of the house, no one would own a home.
We don’t teach our kids to be passive, follow crowd and not think – don’t be passive with your money.
Financial service firms and media convinced masses ‘buy & hold’ and we’ll handle the rest - Don’t be ‘only passive’
Future of investing is more than check a few boxes.
Differences in asset classes
Final takeaway – life is short and goes by fast. Get comfortable taking risks and experiencing risks. Good Luck to Tom with his 500 trades this week.
Investing Topic: https://brt-show.libsyn.com/category/Investing-Stocks-Bonds-Retirement
‘Best Of’ Topic: https://brt-show.libsyn.com/category/Best+of+BRT
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