We Study Billionaires - The Investor’s Podcast Network - TIP395: Option Strategies and Building a Billion Dollar Business w/ Tom Sosnoff

Starting point is 00:00:00 You're listening to TIP. On today's episode, we are exploring option strategies and how to incorporate them into your investing arsenal with Tom Sazanov. Tom began his career as an options trader and went on to co-found Thinker Swim, a trading platform that was sold to TD Ameritrade for over $600 million. But he didn't stop there. He then created Tasty Trade, a media company with shows focused on educating investors about options, and he recently sold Tasty Trade for a whopping $1 billion. all while making hundreds of trades per day in his own personal account. In this episode, we discuss Tom's billion dollar entrepreneurial journey, the appeal of options and how strategies that

Starting point is 00:00:39 actually limit your profitability actually increase your probability of success. How to identify companies with high implied volatility and expected return and what that means, how layering options on top of buy and hold strategies can help generate income whether markets are up, down or sideways, the optimal times to buy and sell an option and a whole lot more. While this discussion is focused more on trading as opposed to investing, it's a very interesting new perspective to bring to the discussion. So without further ado, please enjoy learning about options from the incredibly accomplished Tom Sazanov. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires

Starting point is 00:01:23 the most. We keep you informed and prepared for the unexpected. Welcome to the Investors Podcast. I'm your host, Trey Lockerby, and today I am so honored to have on the show, Mr. Tom Sosnoff. Welcome to the show. Thanks, Jay. Great to be here. 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. And I went down the rabbit hole quite a bit on the whole advanced option 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

Starting point is 00:02:15 you are a breathtaking entrepreneur. I mean, your own journey besides trading has been incredible. First with the think or swim platform, now with this billion dollar acquisition of tasty trade. 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 did you do to celebrate? Um, nothing. Absolutely nothing. I don't think I, we have like a no high fives rule. So I honestly, I don't think I, I don't even think I, so I don't think I did anything.

Starting point is 00:02:48 You know, 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 sort of like, yeah, this is business as usual time to carry on. It's 100% business as usual. I don't even, the crazy thing is I don't even think about it. It's not even part of, you know, like it doesn't, none of it even fazes me or doesn't even ring a bell like nothing.

Starting point is 00:03:14 It's just like, okay, let's go. Let's move on. What's next? Now, have you always been like that? I'm curious because, you know, having maybe a little bit of time to reflect on some of your successes, have you had a chance to sort of distill down maybe a few of the core tenants that you feel has really led you.

Starting point is 00:03:31 to the success you've had. You know, it's kind of a, you feel a little uncomfortable talking about yourself and 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, what it's happening is you're kind of shoot from the hip and you're not even sure kind of what you're good at or what you're, you know, really bad at. I mean, I like to say the thing that we do recognize that we are really good at is just taking risk. Like just doing, it's, there's a strong belief in what we're doing and taking the

Starting point is 00:04:04 risk to pull it off is kind of, it's really hard. Like you can't worry about, like, I don't worry about losing. So that's kind of it, you know. Sort of leap in the net will appear sort of mindset. Yeah, a little bit, a little bit. I mean, like, you're not even worried that if there's a net there. I mean, I guess at some point, 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. Well, interesting. I wonder if the Tacey trade 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, like, the tone and the brand was very just authentic. It wasn't

Starting point is 00:04:48 too polished. It was a little bit quirky. Or it is, you know, still to the stay. It's running, obviously still. But the days I started watching it had some funny music and funny. programming and just maybe talk to us a little bit about that. Well, we haven't changed that. You know, like we kind of had an idea of, you know, what we wanted to do. We weren't really sure what we were doing, but we kind of 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. Like I knew, you know, we were not building another CNBC or another Bloomberg or we wanted there to be a connection between the personalities and between the snarkiness and the sarcasm and the, you know,

Starting point is 00:05:30 because when you think about the trading business, it's a combination of like a certain amount of smarts and a certain amount of locker room antics. You know, 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 that engaged people. And I think that's ultimately what we did. And the only way we know how to create a playground is like through, you know, kind of being silly and having some fun with it. Was it kind of a scratch your own itch sort of approach there with the ethos of the company or just kind of bring your own personality to it?

Starting point is 00:06:05 To a certain extent every startup is. But I think that we were very confident in our core, you know, 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. work. But we didn't know how think or something was going to work either when we first started. You know, like, these are very typical growing pains for any, any small startup, any new startup. And I mean, the only thing I would say differently is that when we built tasty, our expectations

Starting point is 00:06:37 were different. Like when we built think or some 20 some odd years ago, we were smaller time crooks, as I like to say, to steal the Woody Allen movie thing. You know, we were small time crooks back in, you know, 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, you know, this is unbelievable. And this time, you know, when we got to a billion, we're like, eh, you know, like, okay, that's cool, but let's, you know, like, you know, I'm saying. Like, it's just we didn't even, the numbers didn't matter anymore. You know, it was almost like when we were floor traders, you know, the first time you made $1,000, you're like, wow, that's incredible. Like,

Starting point is 00:07:14 I killed it. And the first time you make $10,000 or $100,000 or a million, you're like, wow, it's amazing. And then later on, you're like, oh, who cares? You know, like, it's just, let's just move out. Like, what's the next thing? You know, you start, you get this, have this thirst for validation for, for, you know, for being successful. The money, I know, like so many people say the money doesn't mean it. I'm telling you the truth, the money doesn't mean anything. It's really, it really was never part of the equation. We just wanted to validate that, hey, you know what? We wanted our legacy to be, we're really good entrepreneurs. And that's it. Yeah, something you said a long time ago that I

Starting point is 00:07:48 heard you say stuck with me and it was something to the effect of, you know, you had sold think swim and that was a huge success. And you said something to the effect of, yeah, a lot of people think you just retire off to a beach somewhere, but like that only works for like a week and then you get bored. And it's like, you know, so with Tasty Trade, it seems, was this a endeavor that was kind of 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? When we built Thinkerson, we were 10 years old when, I mean, we had people that were inquiring about the firm because it was a really good firm for a couple times throughout the years. But we really didn't get serious offers until we were 10 years old.

Starting point is 00:08:26 And at 10 years old, we had three, we were public company, we had three cash office for the business. We had to take those to our board. And since we lost control of the board through dilution and other things like that, we basically had to pick one of the three and we picked TD Ameritrade for a couple different reasons. But with Tasty, we never had a single person. We were outcast. I mean, not one person in 10 years. We started in 2011. It wasn't until the end of 2020 when we got our 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?

Starting point is 00:09:03 We were not shopping it. We have this kind of like 10 years. It's the old Theo Epstein used to say, like, I can spend 10 years with one team and then I got to kind of, I got to shake it up a little bit. I kind of feel there's a little bit of truth to that after 10 years, you know, especially where I am in my life. I need to shake things up a little bit. And, you know, 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 Tasty Trade.

Starting point is 00:09:29 And five offers, solid, like real companies with real money and the whole deal. And they were all, with somewhere 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 that direction. And trading along the way, because, you know, 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.

Starting point is 00:09:54 You know, you've moved on, but your trades are still active and still that passion is still there. I still love trading. I mean, this week, I've averaged over 100 trades a day. You know, I did just under 100 trades today. I did like 120 trades yesterday. I did 100 trades on whatever was Tuesday. No, I trade all day long. You know, I love running the business and I love doing the show and I love building technology.

Starting point is 00:10:16 But, I mean, this is my life. I don't really have any, I don't have any hobbies. So, like, some people have hobbies, you know, they paint or they travel. You know, I don't do anything. I just, you know, trade and work. I'm okay with that, too, by the way. I don't feel like I'm, I don't feel like I need something else necessarily. I'm okay with it.

Starting point is 00:10:33 I'm okay with it. I'm good in my skin. 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. So I want to definitely dig in on what exactly is going on there. But we rarely cover options on this show. show. And, you know, I'm tempted to delve into somewhat of an Options 101 discussion, but I know that

Starting point is 00:10:53 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 kind of thing, I definitely encourage folks to go listen to that and 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? Well, it's theoretically, it's not necessarily more advantageous to sell options. It is to buy options because theoretically, the markets are tight. They're priced efficiently. There's no theoretical edge. We like to think that there's some kind of like a mechanical edge, which essentially just means that I like to force the market to beat me

Starting point is 00:11:41 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's only two sides. So there's only two players. And so it's not this massively complex game where there's a hundred different choices or something like that. There's only two sides. And there's lots of strategies, but there's only two sides.

Starting point is 00:12:07 And so my preference is, and 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 a very high probability of success, I should say. And 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 understand. Options are different. Options are strategic, whereas stocks and futures and 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. You can use the strategy with limited profitability and unlimited risk,

Starting point is 00:12:47 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. It just means you like to be right. And so 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 of thing. So anyway, that's my approach. So I prefer the sell side and the short premium side, and it tends to work for me. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer.

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Starting point is 00:17:16 Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. 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.

Starting point is 00:17:41 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, I can 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, you're going to take risk, you deserve to make more than a few basis points because you're taking risk. So we call that kind of positive drift. 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

Starting point is 00:18:23 works over time, generally. And that's the whole thing behind selling puts. I mean, it's some people would 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 positive drift and stocks like to go higher. That's all there is to it. 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? 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% of it. chance of being right. So people like the 80% chance of being right more than they like the unlimited

Starting point is 00:19:05 profitability. I mean, there are people that like unlimited profitability. I'm just one of those people that like the 80% chance of being right. You're capping your profits to get a higher probability of success. You're giving up your unlimited profitability in return for much higher probability of profit. That's all it is. Interesting. Well, with that positive drift sometimes comes low volatility. And as I understand it, option pricing, I mean, options are 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.

Starting point is 00:19:42 So is that simply a metric for risk or is it something more? 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 will. would sell implied volatility when it's high, I mean, as opposed to when it's low. And so usually you 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 volatility is expanding, usually have the perfect scenario

Starting point is 00:20:14 for selling puts, which is low basis, high implied volatility. Low basis, just meaning low price. So low price, high implied volatility, sure, it's a perfect world. So I want to kind of talk about the idea of layering these strategies on top of buy and hold type. 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. And 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.

Starting point is 00:20:45 Well, first of all, it's totally fine. You know, in 2021 now, online trade 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, you know, kind of learning what you can do. And layering anything on top of any kind of static investment, if you're improving your basis or giving yourself a chance to improve your basis, I mean, why wouldn't everybody

Starting point is 00:21:13 do that? Do you know what I'm saying? Like, 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 against it, wouldn't trade something against. It doesn't make any sense to me. If you had a chance to sell a call on anything that you own, it was a liquid marketplace.

Starting point is 00:21:32 You do it. I mean, what do you care if it gets called away? I mean, unless it's your kids or something, you know, who cares? So if we go back to selling something like a naked put, right? 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 kind of capping the losses as well as capping the profits. Yeah, I mean, when you lower your basis, you're obviously, you have to,

Starting point is 00:21:58 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 year way. That's all it is. So, like, you know, if you gave people the choice and you said, you know, here's a bottle of water. You can buy it for a dollar and it's a 50, 50, if it's going to go up or down.

Starting point is 00:22:21 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 a are 20. 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%, 6040 is my probability of profit. And I can make 20% on it. Well, I'd do that. And some people go, I think this order is going to $3. So I don't want to lock. I don't want to cap myself at 20%. I think it's going to make 200% or 300%. I mean, those are 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?

Starting point is 00:23:01 One of the things that intrigued me the most about options when I first learned about them was that it was sold to me kind of as this idea of like, 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 like selling and buying 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. And as I understand it, this strategy is best to use when you kind of think something's going stagnant. Yeah, there's lots of strategies when you think like nothing's going to happen. You can sell an iron condor, you can sell a strangle, you know,

Starting point is 00:23:40 there's lots of different approaches to use. I mean, the beautiful thing about option strategies is it's the same general ingredients. You just make lots of different food with the same ingredients. Well, one of the other concepts that's been hard for me to wrap my head around is something like a calendar strategy and how to or when to use something like that. 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 hoping you're selling something that's rich and hoping it just sits right there. Like a calendar or any kind of a horizontal strategy, you're over multiple months.

Starting point is 00:24:16 You're kind of hoping that volatility expands. So the back month premium that you're buying will go up. So it's just more of, you just kind of have to, you know, a little bit just think through what, you know, 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. Every level of volatility, every level of implied, every level of implied volatility, every level of implied volatility, every level of implied volatility, which is the ability to measure it against itself, every level of price. You know, I mean, every level of S&P volatility.

Starting point is 00:24:48 I mean, it's all part of the concept of when you build a platform around fear. Like, I think, 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 broker's business as it is our obligation to present you, the customer, with the ability to do whatever it is that you want to do. Like, my job is to facilitate opportunity for you. And I don't care what that means. So for one person, it means one thing, for somebody else, something else.

Starting point is 00:25:21 Who cares? We're here, a really good online broker and a really good content provider builds rights content, researches content, and builds technology that 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. Power is going back to the individual, you know, just like sometimes there's this, 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,

Starting point is 00:25:56 which is cool. 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 based 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. 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, it's critical. Well, you touch on having mechanicals for everything, and I've noticed that about Tasty Trade. You use it as this amazing platform for research, and you share the results very often.

Starting point is 00:26:35 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 option strategies? You know, in my mind, the single, there's two, I'm not going to say single, there's two things that we've learned over the last 10 years that kind of blow me away because I missed them for the other 30 years of my career. One is the concept of trade small, trade often, basically 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

Starting point is 00:27:20 essentially creating a portfolio based off 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. 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, which is kind of 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 month, 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. On that last point, what is the target for

Starting point is 00:28:06 getting into the position? How many days do you typically start? Forty-five. Yeah, I mean, you can use any, but 45 is often. And you found that at 21, you get sort of diminishing returns or at least more risk potentially. 45 to 21. It's a beautiful world. Put them on a 45, roll them forward to 21, move on to the next trade. We've always been, we never really understood that until we started to do. I mean, Tasty is essentially a think tank.

Starting point is 00:28:31 So until we started to do all that research, never really made any sense. Now we're kind of feel good about it. And on the trade small trade off and piece, what I'm kind of curious about is what does that look like on a net return basis, you know, once you kind of 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? Zero. I mean, you know, like, I can't worry about taxes. I can't worry about that stuff. I can't worry about stuff I can't control, you know. I mean, the numbers are relatively, you know,

Starting point is 00:29:07 It depends. Most or short term. Some are 1256B eligible, which is max 28%. But generally, I don't worry about taxes. It'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, you know, oh my God, you know, what's my tax liability going to be. It is what it is. I move on. Am I right to remember that I think that there's some tax benefit of doing options on indexes or indices rather than stuff. That's the 1250s. Yeah. max 60-40 split of long-term, short-term. That's all that is. 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. It's essentially in an escrow, right, to make sure that you can cover your basis should the trade go south. In regular margin accounts, about 20%. 20%. So this tends to make these strategies, in my opinion, sometimes only relevant to people

Starting point is 00:30:06 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. And I'm wondering if mainly what I've seen from is this risk of these unrealized gains or losses affecting newer investors, right? 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? Most people are actually fairly comfortable. with risk. Most people aren't used to seeing things marked to market. So like, you know, I mean, imagine if you, if your house or your condo, whatever it is, and it was had a running ticker on it.

Starting point is 00:30:47 And so like, you know, 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. But this is, 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 depreciated every day. Like, it's, 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. So you have to learn some point. The problem that most people have is that they'll give their

Starting point is 00:31:25 money to some money manager or some passive investment. And at some point, they'll be up some money, which is great. At some point, they'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 from that, the learning process delivers zero. There's no takeaways. Let's say you invest your money passively. And after 10 years, you made, let's just say you put your money passively away. And the average passive return over time is like 5, 7 percent, whatever it is. Let's say you make 10 percent a year over 10 years. So in the end of 10 years, you know, 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. You know where all you've got is twice the money that you had when you first started,

Starting point is 00:32:15 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. So I'm going to argue that in order to win, you have to experience things. And if you don't experience things, it's

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Starting point is 00:36:19 and a lot of these millennial and Gen Z type crowd. I even read, I think, earlier this week, that half of option volume on Monday, I think, was in Tesla. There's a large amount of new money coming in in 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, you know, 100 plus trades a day, that there's 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. Chris, on the Tasty Trade demographics, have you seen anything like that where there's a certain

Starting point is 00:36:53 level of interest or is it all across the board? 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. I don't even know what the, like, if you ask 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, 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.

Starting point is 00:37:27 And it's only helped me. It hasn't hurt me at all. Made me into a better entrepreneur. It made me realize that, oh, my God, these people I thought knew something, they didn't know anything. 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 passive, by the way.

Starting point is 00:37:51 All the active investing I've done for 40 years have been great. All the passive investing I've done has been completely losers. And yet, I value those losers. They made me smarter. Well, when you talked about 100 trades in a day, which I keep going back to because I find it amazing, are these trades that are on, you know, 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 trades for minutes or hours?

Starting point is 00:38:14 A lot of new trades, a lot of closing trades, opening, closing, a job. I do a lot of adjusting, you know, tweaking my position all day long, a lot of bunch of scalps, some swing trades. I got to ask, what's the scalp? You know, in and out, like this morning, the first trade I made today was selling some Tesla stock and covering, you know, $10 lower and, you know, that kind of stuff. You know, that's the stuff that turns me out. I like it.

Starting point is 00:38:36 So you're the guy who is 50% of the volume of Tesla options. No, no, no, no. I just traded small, having some fun, just traded small. It's great. You know, it's just like having some fun, buying and selling some. and futures, you know, just playing. It's just a big playground for me. And I literally have been playing in this playground now for 40 years. Like, it's been every single day, the bell goes off in the morning. I love it. And we play until the end of the day, and that's

Starting point is 00:39:00 it. Is that feasible for folks who have other day jobs, though, that, you know, don't, maybe not, don't have the same kind of time and attention during the market? Sure. I do it. I have a day job. I'm a CEO of a billion-dollar company. I mean, you know, I mean, I have a day job. Of course. I do a show for three and a half hours. day. I got to run a company after that. I mean, yeah, sure, of course. 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 option 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 some people. But have you learned

Starting point is 00:39:37 anything or adopted any strategies based on how someone like Buffett has structured his traits? No, I mean, I think I like Warren Buffett because, although I don't know anything about him other than like whatever I've read commercially or whatever kitschy little thing we've seen over the years. He seems like a very interesting, decent man. You know, 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, you know, through the grapevine over the years. But I don't necessarily, I mean, I would argue that, you know, Warren Buffett is he's obviously an outlier of men.

Starting point is 00:40:18 asset 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 his career is incredible. But I wouldn't look at him today or Charlie Munger, any of those guys, and say, well, I want to do what they do? Like, it doesn't mean to think. Interesting. When you were talking about staying small and trading off and what size are we really talking about? You know, I've heard some people on the long side go up to, say, 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 allocation basis? It depends how big your account is. But if your account size is like

Starting point is 00:40:56 relatively, if your account size is average, let's say 50,000 to 100,000 in that range, you know, it could be anywhere from one to three percent. If your account sizes is larger, it could be anywhere from a fraction of a percent to, you know, one or two percent. It really depends. But we almost never get bigger than 5% would be, for me, would be a huge position. I don't go there. Well, the reason I kind of bring a Buffett, et cetera, is that one thing, when I was speaking to somebody very early on learning about options, they highlighted that, you know, if you look at something like the Forbes 100, right, and the billionaires in the list, you don't often see option traders up there in the highest ranks, right? Because there's something about compounding capital and leaving it alone, it seems

Starting point is 00:41:40 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, like, is there something just that should be respected about the sport and the fun of it versus like the wealth-building aspect of it? Or is this like your go-to strategy for wealth creation? Well, the richest person in Illinois is Ken Griffin, who is, you know, owned Citadel. Basically, they've made all their money selling options. The richest person in Florida is Tom Petifree, and he's made all his money owning interactive brokers and basically trading options. The richest person in Philadelphia is the guy that owns Susquehanna. I mean, in Pennsylvania, I think is guys from

Starting point is 00:42:20 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, you know, like, but I would be, I think this is, you know, outside of crypto, because there's a lot of very interesting new crypto gazillionaires. But when you look at the financial service world, I would say that in the modern era, there are either all the wealth has been created on the option side, the future side, or the crypto side. I don't think it's the stock side.

Starting point is 00:42:56 Interesting. And do you think that if derivatives start forming more and more on the crypto side or even the Web 3NFT side of things, would you be interested in that market? Of course, I think it's going to be massive. I think the derivatives on the digital asset space is going to be huge. And 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.

Starting point is 00:43:22 And underlines 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 all the markets that haven't been exposed to Druidus yet. Very interesting. One other question I had around the trading is what tools do you like to use? If I remember there's Bollinger bands, things like that come to mind as far as trying to find no, you're shaking your head as far as.

Starting point is 00:43:49 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 kind of the public way of thinking about, you know, we got to look at a chart and see what's going on. But there's no such, you know, fundamental. I look at statistics, probabilities. I look at the math. I have zero interest in fundamentals, no news, no company fundamentals,

Starting point is 00:44:12 no interest in hearing what anybody else has to say, and zero interest in technical analysis. Amazing. So if we're looking at price, are we talking about reversion to the mean? There's no such thing as reversion to the mean in price. It doesn't, there's no support for it in math world, but there is support for reversion to the mean and implied volatility. So we do look for reversions to the mean implied volatility, but everything else we treat the markets as being, I'm an efficient market theorist, treat the markets being random. With the implied volatility, you know, I think about the VIX a lot and how it's kind of destined to keep going lower and lower based on the way it's structured. Is that mean that

Starting point is 00:44:46 risk premiums and options will ever go lower and lower? Is it all just relative? It's all relative. The VIX itself, I mean, some of the ETSs that always have, that are in contango that always go down, that's one thing different. That's market structure. But the VIX has a floor, whatever that floor is, nine, ten, eleven, twelve, whatever it is. So, no, it'll never go lower. But you can't just buy it because the cost to carry is so high. What about earnings? How do you typically look at earnings? Well, I base everything off expected move and implied volatility rank. So I'm looking for high implied volatility rank and then expected move like, like I didn't trade Apple today because the implied volatility was too low for me and the

Starting point is 00:45:25 expected move was too low. But generally, I will trade expected move and implied volatility rank. That's it. That's all we do. Is expected move an proprietary calculation? No, that exists on every platform? Well, we've built it into our platforms. I don't know what other firms have been. 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 trades? Is it 100 different stocks? Is it five stocks? How many? I can tell you. I'd be curious to know. All right. Well, you got to give me a second here. We're going to count them up for you. Looks like 30.

Starting point is 00:46:03 30 for today. Yes. 30 underlines. 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 what brought? 20 to 30, 20 to 40 a day?

Starting point is 00:46:17 Yeah, sure. Interesting. And is it all the usual suspects? Is it within a circle of competence of yours at all? Everything thing that's liquid is in play for me. Like today, I'll just give you it in. I traded my first trade of the morning was in 10-year, notes, that's futures options. Then I traded Bitcoin, Ethereum, Pocodot. Then I traded Garmin, Tesla, eBay, Shopify,

Starting point is 00:46:41 coin, Facebook, Affirm, more eBay, more coins, Starbucks, natural gas, Hutu, Snap, soybeans, crude oil. I mean, that's just the name of a couple. But yeah, I mean, I'm all over the place. I'm indifferent to product. I don't give a crap. If it's liquid, I don't care what it is. The name means nothing to me. It's more about where that implied volatility and expected return. Do you filter for those numbers? Does things possible for you? I do. I do.

Starting point is 00:47:08 And it's also about liquidity. Every single thing I trade is liquid. Bit-esque spread is very tight. Bit-ass spread is relatively tight. You know, most are liquid products. Mix it up. Yeah. Very cool.

Starting point is 00:47:20 Well, what is next for Tom Sosnoff now that you sold your company for a billion dollars? And you were shaking things up, as you mentioned earlier. What's getting you out of bed in the morning? Well, I'm still doing what I've always done. I'm running this company and, you know, we're trying to take it 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 in the UK, so that's cool. So that's what I'm doing right now. But, you know, 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, like, 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 Tasty Trade. It's the greatest show on earth. And I love building technology and trading. So I'm pretty happy, but I'll keep myself busy by, you know, challenging myself until, I mean, I'm never retiring. So I'm just going to keep doing stuff until, you know, until I can't do it anymore.

Starting point is 00:48:23 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. You know, Trey, when it all boils down to it, it's just like, you just look around and like, okay, this is cool. Like, I would do this every afternoon and talk to people about it because it's just

Starting point is 00:48:42 if it inspires someone like you or gets somebody else going, you know, 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, you know, take it forward. 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, Tasty Trade, any other endeavors that you're working on. I'm on air every morning on TastyTrad is the largest digital financial network now in the world. So TastyTrad.com and we're free.

Starting point is 00:49:12 Everything's free. The content's free. The archives are free, everything. So you can check out TastityTrad.com. I'm on from 7 a.m. central time to 10 a.m. central time. And then from 2.30 to 3 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,

Starting point is 00:49:29 and all the technology we've built, it's on TastyWorks, and it's a downloadable. So you can just go to TastyWorks, you can download it. And if you like our stuff, you know, you can open account with us. Our rates are great. Our content's amazing. And our technology blows away everybody else. And we offer, we're the only firm that offers everything. Stock options, futures, futures, options, crypto.

Starting point is 00:49:49 We have everything. Well, thank you again very much, Tom. I really appreciate it and look forward to have you on the show again soon. Awesome. Thanks, Trey. All right, everybody, if you're loving the show, please go ahead and follow us on your favorite podcast app. And if you'd be so kind to leave us a review, that'd be great. We always love to hear from you. Or if you want to reach out with feedback, you can always find me on Twitter at Trey Lockerby.

Starting point is 00:50:09 And definitely don't forget to check out all of our amazing resources at the investorspodcast.com or simply Google TIP finance. And with that, we'll see you again next time. Thank you for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional.

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We Study Billionaires - The Investor’s Podcast Network - TIP395: Option Strategies and Building a Billion Dollar Business w/ Tom Sosnoff

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