Tom Sosnoff is a champion for self-directed investors. He founded Thinkorswim, a brokerage with innovative charting and option data functions. After he sold Thinkorswim to TD Ameritrade in 2009, he created Tastytrade, an online financial network which provides daily contents of trading strategy and market research for individual investors.
I listen to him and his partner, Tony Battista (lovingly called Bat by the community) every day.
Tastytrade is extremely addictive. You watch how successful traders plan and execute each trade real time. You hear rap battles between Twitter and Facebook. You listen to Ben Bernanke singing about his monetary policies. Every day, there are new lessons you can apply in trading. It is basically a finance entertainment you laugh and learn. In Tastytrade world, finance is not a subject that induces yawns and headaches.
The premise of Tastytrade is that you can make consistent profits by using option strategies of mostly selling premiums because you can customize probabilities of profit and risk levels through them. Researches by Tastytrade show that volatility (the fluctuation of prices) is often exaggerated, resulting in higher premiums which buyers are willing to pay for the right to own stocks at certain prices. You increase your chance of profit by selling these overvalued options and waiting for them to get cheaper. Basically, you are the house who sells bets for eager card players paying more to make more. You know, the house always makes money despite occasional winners. Is it a trick? No, it is math.
Large unexpected outlier moves (nicknamed “black swan events” by Nassim Taleb) are the risks that we are betting against. However, if we make a large number of trades allowing probabilities work out, overall trades can be profitable despite outlier losses because these extremely large moves are rare enough. Also, we can protect ourselves against black swan events by limiting risks we are taking at the time of entering trades.
Trading along Tom and Tony, I felt the lessons I learned from them apply beyond the world of finance.
1. ‘You are the best manager of your money.’
Tom shows again and again why your money should not be managed by “professionals.” First of all, it is no longer true that only professionals have knowledge, skills and information that we don’t have access to. It would certainly take time to gain skills that professionals spend years to acquire. However, technology and information available to us make it easier for us to trade like professionals if we are willing to experiment and learn.
Why should we invest our time and energy to learn trading instead of leaving it to professionals? Because money is an important part of our lives and no one cares more than we do about our own money. While our goal for managing money is to maximize profit, professional manager’s goal might be different. His profit might not align with ours when he can generate commissions regardless our profit or loss. Their focus might be on not losing more than benchmark in order to avoid being blamed.
I learned from Tom to appreciate being responsible for my own decisions in other areas of life that I rely on experts. There is always a learning curve, but no one is as serious as myself about being an “expert” of my life.
2. Focus on building domain skills and ‘market awareness.’
Tom emphasizes the importance of building domain skills in trading by making small trades frequently. That way, you will gain “market awareness, ” a way to observe and “feel” market which enables you to spot more opportunities in market.
Anyone who has tried to learn a new language or an instrument understands that it takes time to build a skill set. You have to be “engaged” fully, practice every day, and give enough time for a new skill to sink into you.
However, We don’t consider finance and wealth creation as a skill similar to language or music skills. Many people start investing thinking they will make profits by picking the right stocks. Tom says it is not which stocks we trade that make us successful but trading skill and market awareness we can apply to any products in any market conditions consistently. He trades “indifferent to products” whenever a product meets his criteria (of high volume, extreme prices and overpriced premiums).
When you have “market awareness,” which allows you notice nuances of the market like overall macro moves, correlations between different equities, bonds, commodities and relative strength or weakness in underlying stocks, you are able to see more opportunities to take advantage of unusual divergences. It takes time to build these less concrete skills, but they are powerful tools you can use once you attain them.
We are often blinded by short term wins and losses in our lives and forget the fact that we are building valuable skills and awareness through our consistent efforts. For example, there are ups and downs of running own business. But, you will eventually learn a skill of running a profitable business that you can apply to any kind of business.
It is also true in physical health. As a woman who has always struggled to keep a healthy weight despite insatiable love for food, I have to remind myself that developing a good relationship with body, “body awareness” is more important than a quick weight loss here and there.
3. ‘Don’t be afraid of taking risks. Take risks when nobody does, don’t take risk when everyone does.’
Tastytraders get paid to sell out-of-the-money options which are not worth anything (no intrinsic value) until the stock price reaches the option strike. Buyers still pay some price (extrinsic value), because once these options become in-the-money, they will be worth at least the difference between the stock price and option strike price (intrinsic value), plus any additional value of holding option contract over time.
As a premium seller, we benefit when buyers are willing to pay more. Buyers pay more when they see less risk of losing their investment as an option strike becomes closer to the stock price. They also pay more when they expect market volatility in the future. So, we trade against what everyone does. We tend to sell as price goes up, and buy as price goes down. We take advantage of a situation when everyone fears volatility in market.
We are not trying to be a contrarian, always picking a direction against a trend. But it is still fun to be the cool one who is against crowd and Tom says we can use directional bias as an engagement tool, something that keeps us excited. However, in essence, instead of trying to predict a direction of future moves, we remain neutral and try to benefit from price moves exaggerated by emotions such as fear and blind exuberance.
In our everyday lives, we pay a lot of premiums over intrinsic values of products we buy. Fear and desire are the two major reasons we would pay more for something. Every news about an accident or a disaster creates fear in us and makes us pay more to prepare against them. A new luxury brand bag that a beautiful model carries in advertisement is engineered to create a desire that you want to look as good as the model. You end up paying an incongruous amount over the cost of manufacturing the bag.
On the other hand, you can profit by creating premiums that people are willing to pay to you. By satisfying what people desire and fear, you can create the value that is beyond the intrinsic value.
I apply the lessons I learned from Tom and Tony in other areas of my life. I ask myself: 1) If I am taking full responsibility of my action. 2) If I am improving a skill without focusing on immediate payoff. 3) If my action is the result of avoiding risks, influenced by unexamined fear and desire.
Sometimes, I feel premium-selling trading mentality invaded too deeply into my everyday behaviors. But, I protect myself from being a cold money machine by factoring in non-money values, my and others’ cherished feelings. Not knee-jerk ones, but peace of mind and connecting with others rank high in my portfolio valuation. And I have a good example in Tastytrade family.