Last week the ETHS Investors Association had the privilege of Tom Sosnoff speaking to the club. Mr. Sosnoff was a floor trader on the CME for 20 years, and founded Thinkorswim (An options brokerage) in 1999. In 2009 Thinkorswim was acquired by TD Ameritrade for $606 million. Mr. Sosnoff then founded Tastytrade, an alternative financial news network, where he is the host of the live show “Get Tasted” for three hours each day. Most recently, he founded Dough.com with the aim of educating millennials to trade. Mr. Sosnoff is so driven to educate the young about trading derivatives, that he agreed to speak to 25 members of our club, when on average he speaks to groups of 1200. Mr. Sosnoff’s investment strategy differs significantly from the strategy I and most investors have been using during the last era of investing. He believes that the market is unpredictable, and no matter how much analysis one does, the statistical chance one has of making money off a stock is 53% (due to the slight upward trend of markets). Mr. Sosnoff’s investment strategy allows one to choose their probability of profit (he likes 60%). If one executes enough trades with a 60% chance of making money, statistically they will end up making money. Another feature of Mr. Sosnoff’s investment strategy is that it requires significantly less capital, for example to control 100 shares of Tesla with stock it costs about $18,000. With his strategy one can control the same amount of stock for under $300. Profits and losses are also controlled, going into a trade one can see their maximum profit and loss.

So what is his secret?

Derivatives

No they are not the same as derivatives in calculus. Don’t know what derivatives are?

Lets define some terms before we move forward. A derivative (also known as an option) is a contract whose price is derived from an underlying stock. Basically, the price of a derivative somewhat follows the price of a stock. There are two types of options, Call Options and Put Options. Most options control 100 shares of stock. A Call Option allows one to buy a stock at a specific price. So a Facebook 62 Call allows one to buy 100 shares Facebook at $62 a share, even if Facebook is trading for $65 a share. inversely, a Put option allows one to sell a stock for a specific price. For example a Tesla 190 Put would allow the owner to sell 100 shares of Tesla at $190 even if it is trading for $180. All options also expire at a certain date, usually the third Friday of a given month. For instance, a March FB 62 Call would give the owner the right to buy 100 shares of Facebook for $62 a share until the third Friday of March.

Mr. Sosnoff’s strategy requires putting different derivatives into packages (buying one, selling another) to give one a higher probability of profit. For instance, one strategy is called buying “covered.” Let’s say a stock is trading for $50 a share. Our chance of making money off the stock is 50/50. It could go up or it could go down. I could short a put (shorting is one sells something and then buys it back later) and receive $5. Since I pay $50 for the stock, but receive $5 for selling the put, I end up only paying $45 for the stock. That way, if the stock stays at $50 a share, or even goes down but stays above $45, I make money. There is a higher probability of profit in buying a stock that is trading at $50 for $45.

The risk in derivatives trading is that for each trade the percentage one makes or loses is huge. If I made a trade involving $300, it is not unusual for me to have a profit of 66%, or $200. It is also not unusual to have a loss of 100%, or all $300. Although this may be scary for some, since I have a 60% chance of making money on most trades I place, I still end up making money.

Currently, I am teaching myself derivatives trading. I have started trading derivatives with my own money last week. I know this can be confusing, so if you have any questions at all, please leave me a comment. If you are more interested in Mr. Sosnoff’s style of investing, check out his companies Thinkorswim and Tastytrade, and specifically Dough.com for beginners. I would once again like to thank Mr. Sosnoff for speaking to the ETHS Investors Association. We are very excited to learn his new style of investing.

Very interesting and informative article.