087: Tom Sosnoff – Speaks on Life Experiences, Trading Options, and Reaching Your Potential

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Traders, what's going on? I'm pleased to have you here. Let me introduce this week's guest. This week on the podcast, I spoke with Tom Sosnoff. Many of you will already know who Tom is. He's a pretty popular name within the industry. But if you don't, Tom was a floor trader on the CBOE for roughly 20 years. Before going on to co-found Thinkorswim, a very popular trading platform and brokerage. In 2009, Thinkleswim was sold to TD Ameritrade for approximately$606 million.

Tom left the company shortly after and started financial news show, Tasty Trade. Anyone who has watched the show knows Tom is very opinionated and he didn't tone it down for this interview either. Having listened back over this episode afterwards, I am a little disappointed I didn't push him for more depth on some of the bold statements he does make, but you know, I guess that is hindsight. Anyway, in this episode we hit on the issue with being too risk adverse in markets and in life.

Tom's extensive trading career, plenty of talk about options, the value of intellectually challenging ourselves with respect to finance, and much more as well. Now just before we roll into the interview, I do have something very cool to share with you. For the first time, ChatwithTraders t-shirts and also hoodies are now available with two designs to choose from. But these are only available for a limited time. So you have until September 2nd to purchase.

Otherwise, unfortunately, you will miss out. To view and purchase the t-shirts, you can go to chatwithraders.com forward slash t-shirt. Now there's no dashes in that, it's just chatwithraders.com forward slash t-shirt. Both the t-shirts and hoodies are printed on American apparel, so they're premium quality and very comfy to wear. Again, that's chatwithraders.com forward slash t-shirt to treat yourself.

Alright, this is episode eighty seven and here is my guest from Chicago, Tom Sosnoff. I noticed you did a TED talk last year, uh being two thousand and fifteen. I mean, what was that like? That must have been a pretty cool moment in your career. Um, it was okay. You know, it was weird. I got there like they they had me coming like

six o'clock in the morning and I didn't go on till like eleven. And by the time I got on I was like I was already done with that. You know, like I was ready to get out of there. So After walking around for five hours there I I kinda lost a little interest. Um it was okay.

You know, the clock I had in front of me wasn't really giving me a good time, so I I thought it was okay. Not my best. Sure. Well I mean I really enjoyed the talk and I I want everyone listening to this to actually check it out. I'm gonna link to it in the show notes. Um, but one of the things you spoke about during that TED talk I thought was really interesting and that was um

And I'm and I'm hoping you can share this story uh with listeners just briefly. Uh was the story about how you started out as a golf caddy and the game that you used to play. with everyone there. Um I understand it's somewhat shaped your risk tolerance and your respect for probabilities. Uh would you mind sharing that with us? Well, yeah

Um, you know, it's funny because I like to feel like I've I had way more life lessons when I was uh fourteen and fifteen years old from an old caddy master named Jimmy Rocco. I don't even know if he's still alive today. But uh, you know, he would he would clean me out of um they used to call when you when you caddied eighteen holes, they'd call it a loop, right? And we and uh I was just a kid and I was maybe, you know, like I said, fourteen, fifteen and sixteen.

and we had to do two loops on the weekends otherwise you couldn't go out in the morning, you know,'cause there was there wasn't enough caddies. So we'd have to go thirty six holes and and I felt like every dime I made it was all cash back then too. And I felt like every dime I ever made, Jimmy Rocco took from me. So it was a cheap life lesson, as they say. Um, but he cleaned my clock for a couple of years before, you know, I finally got some money back from him.

But uh yeah, he used to he used to pick us off with uh chipping into a bucket for quarters and yeah, it was a pretty good life lesson. We were all just a bunch of dumb kids and and Jimmy Rocket was a total grifter and and you know, it's a good good life lesson as we say.

That's awesome. So so how did the the bucket uh the bucket I don't know if you want to call it the bucket game, but whatever it was, how did that actually work? I mean you flipped a a coin into a bucket and whoever could chip the ball into the bucket got to keep all the coins, is that right?

Yeah, you know, so back back then um we would we would use like you remember you remember like going to a carpet store and buying a two foot carpet sample? So what Jimmy Rocket would do is he'd go to this carpet store in the neighborhood and he'd pick up a bunch of

sample carpets, it maybe like like not really shag carpets, but just like a you know, d a l a little bit of a soft carpet,'cause they didn't have astroturf or something like that back then. And and he'd put down a carpet on one side and about fifteen or twenty feet away,

he'd put a garbage pail with no wall behind it. And what we'd have to do is, you know, if you wanted to step up and and there'd be a balls there and and clubs. And if you wanted to step up with a sandwich and chip it into the bucket, you had to put a quarter into the bucket first.

And so he'd be behind this uh you know, caddy masters where he was behind some door, behind some screen or something. And he'd be sitting there watching all the caddies in there. There'd probably be like a hundred kids or fifty, a hundred kids, whatever it was.

And we'd all take our turns and we'd walk up, throw a quarter in the bucket at a time, or you know, two or three quarters, whatever change we had on, and take our shot. And if you made the shot, you got all the money that was in the bucket. And we just wanted to make the shot.

And he just wanted our money. So as soon as there was like as soon as he saw enough money in the bucket, he'd come back out, throw his quarter in and the guy was a great golfer and he he killed us every time. Every time he shot he made one. So you know And it'd only take the shot if the bucket was

Full way. If there was if there was enough quarters to cover the bottom of the garbage can. Yeah, so as a smart man. Very well yeah, I mean at the time, you know, it was it was money to him, it was personal to us. Yeah, yeah. Absolutely, I can imagine.

Yeah, after after my experiences playing golf my one of my favorite stories with him um since we're on Jimmy Rocco stories Is is he convinced me one night as I was getting older I was probably like eighteen or nineteen, I don't know, maybe seventeen or eighteen, I don't remember what I was, but I was playing golf at that point on like the golf team at my high school.

and he convinced me that I was a better golfer than him, even though he was a great golfer. And And one night we went out and played nine holes and he made me give him a half a stroke of hole and he shot a legit thirty one. And so I was giving him a half a stroke of hole on a part thirty six and he shot a thirty one. Needless to say, I lost all nine holes and

I owed him my caddy money for the next like three weeks. So that must have been devastating. Well, you know, in in the long run it was relatively cheap for me. Those were cheap lessons. Probably made me into a better trader.

Mm-hmm. No, absolutely. I mean th it's that's the sort of thing that sticks with you for sure. Oh yeah, for definitely a whole life. Yeah. And also in your TED talk I found it really interesting. Um, you spoke a lot about risk and not even just risk as in like risk in financial markets, but just kind of like taking risks in life, which I thought was really interesting. So

I mean I'm gonna I I really want everyone to check out that your TED talk. Like I said, I'm gonna link to it in the show notes. Um but I think people are generally, especially this generation, um people tend to be really risk averse and I think it's a big mistake. And when we were growing up and and like I was in my, you know, early twenties after I finished college, you know, I I I kind of had the mentality, we didn't know there was no such thing as entrepreneurship then.

So we really didn't know you know, we didn't know the difference between taking risk and not taking risk, but we kinda figured out that, you know, if you're ever gonna do something in life, if you're gonna take your shot or whatever it is. Um, y you probably want to do it when you're younger. I think that's more common sense than anything else. And so

you know, we were willing to kind of roll the dice. And I think today, you know, with very with a with tons of debt from uh you know from from higher education with just a lot more pressure on you to succeed in everything, people are a lot less willing to take risks. And I I think that's really changed the environment around risk taking and the environment around entrepreneurship and and and and and some of the creativity that's out there today among millennials.

Yeah, so that's actually something I wanted to ask you. I thought it might be interesting to get your take on how do you differentiate uh good risk and bad risk taking? Like is there a difference between, you know, being um I don't know, having that entrepreneurial spirit and and going out and getting it and just being careless. Is there any difference between good risk and bad risk? Like how would you differentiate that?

Well I think when it comes to in the trading world, um I think that there is anytime you're in a highly efficient marketplace and you're able to assign real numbers. to um real numbers and real probabilities because in other words if something's tradable it has real markets and real probabilities and then I think there's a difference between um high probability and low probability, which to me is a difference maker with respect to what they call real risk.

Um meaning that, you know, it's j it's just it's healthy to learn how to be successful. I think the the I think when you're taking, you know, different kinds of risk in life, it's it's a little harder to assess what you're calling real risk. Like like in other words, we get we Something has a ninety five percent chance of success. Just in general. Like, you know, I have a ninety five I have a ninety nine percent chance of driving home tonight.

and not getting into an accident or or maybe 99.9% chance of driving home tonight and not getting an accident. But then but then what are the risks, you know, if I was to get in an accident? I don't know if it's efficiently priced. Like car insurance is not efficiently priced. Hurricane insurance is not efficiently priced. It's probably 80% over. So I think a lot of the risks that we take in life, generally speaking, are not efficiently priced.

So I think one of the problems that people have with taking risk is they generally lose. And the reason they lose is because there's no context around that risk that you're taking. In the world of investing and trading and everything else and the stuff that I love to do. It there's so much There's so much efficiency around pricing that you can put real context around risk and therefore it's a whole different game.

And that's what I love about the business. Hmm. Okay. Well let's let's get into that. So I mean, how did you get into trading? Like, where did you start out?

Um, right after college. It's really the only business I've ever been in. I got a job right after college. Um uh I graduated in m college the summer of Um the summer of nineteen seventy nine and and uh in the fall of nineteen seventy nine I went to work for Drexel Burnham, nineteen seventy nine, nineteen eighty, and and six months later I moved to Chicago to to come out here to trade. Okay.

A couple of things. I believe you graduated with a degree in political science. Like what actually attracted you to financial markets? I mean, those sort of seem like two Totally separate. Well remember, nineteen seventy nine was was a um was a time when gold was ex I don't know. How old are you? I'm twenty five. Oh you're twenty five. Okay. Well this is you're you're you're in between my kids' ages, so I have a twenty three year old and twenty seven year old.

So 1979 was a year that gold and silver were exploding. Um this was the Hunt brothers cornering the silver market. This was we were in a real recession. Interest rates were approaching, you know, twenty percent in short-term rates.

long term rates were higher, gold and silver were exploding, there was chaos, the markets were were dead, there was nothing going on. And um we were in a real recession. Kids coming out of college, you know, I mean you would take any job you could get at the time. That's just how we all You know, there wasn't anything out there. They weren't they weren't searching for, you know, twenty-two and twenty-three year olds.

And, you know, so I would go to any interview any interview I could. I I my my first choice was to work for a lobbyist in um uh, you know, in in either state government or or national politics. And I wanted to, you know, hopefully get a job with a lobbyist or or a politician and learn you know learn my way, whatever that meant. But the job interviews that I turned out to be best at were in the world of finance. And the first job interview that I really had was

to go to work for Drexel and you know at the time you kind of bullshit your way through and turned out, you know, that was a better field for me. And then the first time I went and visited the exchanges in Chicago, which was the Chicago Board Option Exchange. You know, I walked on the exchange and thirty seconds later I'm like, this is where I want to be. You know, this is the coolest place in the world, so I want to be here.

No doubt, no doubt. Okay. So I mean, I believe you were only at uh Drexel Turnham for a short amount of time and then they actually went bankrupt. What led to their bankrupt like what went down there and and Well, I was actually there only about six or eight months. But but when I they when I left there they were an extremely rich firm and they were not even close. Their bankruptcy was all around the junk bond crisis.

And I don't know if you remember the whole Michael Milken incident, but Michael Milton kind of created the junk bond era and he was a Drexel person that made hundreds of millions of dollars. And in the downfall of Michael Milken came the downfall of Drexel Burnham. And so

Uh the reality is that it was much more of a it much more of an isolated situation tied to one person. And that was probably in the the mid eighties. It was a long time later. It was probably five or six years later. I had already left the firm

And uh you know, I was already in Chicago kind of making you know, making a name for myself on the on the floor of the uh Chicago Board Option Exchange. Okay. Got it, got it. So when you did go to the C B O E, I mean Wh where did you start? Like how did you learn how to trade and what was your learning curve like there? Oh I I'll never forget I got to the floor and and I was backed by a couple of guys from New York that I met at Drexel that uh wanted

They wanted some young kid with no ties to go to sh to go to Chicago. I was twenty three and so, you know, I didn't have any ties. I wasn't married, you know, I had no reason not to come to Chicago, so I packed up my car, came to Chicago. I was on a seat the very first day.

that I came out here and I walked onto the floor. I had no idea where what I was doing, where I would go. I didn't understand a thing anybody was saying. So I picked a crowd where there was a couple of where there was not that many people. I remember at the time it was a national semiconductor. and uh which uh the symbol was N S M back in the day. They're no longer in existence. And I walked in the crowd and and uh there was a guy there that was from The same hometown as me.

And I I I walked up to him and first I walked up to his clerk who happened to be about the same age as me and we're we're still friends today. you know, thirty five years later. And I said, Hey, you know, we're from the same town. He said, Hey, how you doing? I'm I'm I'm here clerking for my brother So I walked up to his brother who was in the crowd. He was trading and I said, Hey, we're from the same town. I put up my hand to shake it and he goes, Fuck you

And so I knew right there, okay, this is not gonna be a picnic. And I figured it out really quickly, you know. The the trading floors were were lots and lots of alpha males, very tough kids, you know, all independent. All strong i strong egos And and and you know, and and it was the kind of thing where, you know, they were all grifters and and they were nice people and they but they were just all the same makeup and you know, it kind of fit my personality. I fit right in and and I spent the next

You know, I figured it out after a couple of months and I spent the next twenty years there. Okay. Okay. So a lot of your learning was essentially sort of almost like a trial by fire sort of scenario. Oh absolutely. No, they throw you in there. There's no

Over the years I hired lots of traders, hundreds of traders over the years, because that's how I got a job. Somebody, you know, backed me and so I figured, you know, when I started making money I have no problem, you know, trying to back others. And we hired kids that were gonna go on, you know, for PhDs and brilliant, you know, MBAs and some of the smartest people around that never were successful and we hired

you know, professional wrestlers, professional football players, you name it, over the years. We tried everything. I there was no There was no miracle formula for floor traders. Some people had it, some people didn't. You know, three, four, five percent of the people made it. And I was lucky, I was one of those people. That's all. It was just luck. The guys who backed you initially, did they

Offer you any sort of guidance or mentoring or was it? No. Okay. Absolutely nothing. It was a total but I didn't even offer that to the people that we hired because we didn't know You know, I mean we said, Hey, listen, go down there, go make some money. You know. And uh you know, we used to in hindsight we used to laugh about it, but really, you know, we didn't offer much. It's it's kinda hard to explain.

It wasn't a business that um there was only a few outliers. And for everybody else it was, you know, you know, we were pretty much trying to survive at the top of the pack. You know, there was a couple of outliers that made it to a different level, but for the majority of us You know, we were the best of the rest type of thing. So were there any like major realizations you had during your time on the floor that that made a significant impact on the way you traded?

You know, it's a it's a very fair question. I think over time, um, we definitely tried to think outside the box a little bit, meaning that we Um, we tried to do things like we managed money, we built our own technology. Like I was never one to sit still. So we managed money, we we um uh we built prop trading firms, we built new technology, we did program trading, which was like the the precursor to high frequency trading. I mean we tried everything throughout the years to see

you know, what will take us to another level. So I never sat still, but um You know, my my takeaway was always the same for me. I always worked I tried to outwork everybody'cause I knew I couldn't outsmart everybody, but so I tried to outwork everybody. I like that.

Have you always had this this quantitative way of looking at things that you do now? I know I know on Tasty Trade you're often talking about things in a very sort of quantitative manner. Was that always the case? You know it It probably didn't start that way for me until until late on my floor trading career and really as we started to build thinkorswim.

During the process of building Thinkorswim, I learned for the first time how to articulate the business and how to talk about the things that we were doing and also how to put context around everything that we were doing. So I would say that in fairness, It wasn't in the first twenty years of my floor trading career, my goal was to make money.

and was to put myself in a position where I could where I could choose what I wanted to do, you know, at a different point in my life. And we got to a point where we had made enough money where we could go out and build think or swim.

So that was what we chose to do with our capital and we rolled all the dice and and, you know, built an amazing firm. And at that point I started to learn about Um, I started to learn about the quantitative side, about the idea that there could be real probabilistic outcomes, that everything was as efficient. I always knew everything was efficient, but I didn't know that you could take that efficiency and apply it to scalable technology and to predictability with respect to outcomes.

Right. Well I'm very keen to to hear more about how you started Think or Swim and that whole whole journey in in just a moment, but I'd really like to uh dive deeper into options. I know a lot of listeners will be really interested to hear what you have to say on the subject, uh, of course. So

What was it about options that appealed to you over other markets, you know, let's say stocks or futures or or, you know, any of those markets? Well, again, it it came down to, you know, if if you had when I was twenty two or twenty three years old, if you had said to me, Hey, we're gonna send you to the floor of the of the New York um Comex exchange so you can trade silver futures, I probably would have been a futures trader.

You know, it just so happened that life works out in such a way where, you know, you end up in a place where wherever I would have ended up I didn't know anything about. So I happen to have ended up on the option exchange, which was probably a function of the seat leases were a little cheaper on the option exchange than they were on the futures exchanges. So I ended up in options. Um, you know, I fell in love with options. Because

They are strategic and which is very different. Futures and stocks are very black and white. You either pretty much you buy'em or sell'em and there is no there's no gray area. I mean, you know, you're you're either right or wrong based on, you know, pure direction. I learned quickly in options that it's much more than direction. It's a very strategic, it's a gray area game and you can be right and make money. You can be wrong and lose money.

And I'm sorry, you can be you can be uh you can be right and lose money, or you can be wrong and make money in options. And that was a that was a huge difference maker for me when I finally figured it out. So, you know, you talked a little bit there about the the gray area of options. I mean, what are some of the misconceptions outsiders often have about options trading? Is there anything that stands out to you?

Sure. Well well the the most popular misconception is that there is this ridic that that eighty five percent of the people lose and there's because there's this most there's a ridiculous amount of risk. with naked options. And the reality is the only way to be successful in the world of options is to learn how to trade small, how to manage your profits, and how to sell options naked.

And it's completely everything we do at Tasty Trade now goes completely counter to what the traditional norms are with respect to traders, investors and the entire industry. You know, we're the complete black sheep of the world, which I love.

When it comes to trading and investing, because we are advocates for individual active trading when we believe that it's the only way to be successful. So so why you So why are you so fixated on that? Why do you believe it's the only way to be successful? Because I don't bel because I actually don't believe I I believe in the statistics like you were mentioning before. I believe in the the mechanics behind the statistics.

And if you have a statistical chance of success that is better than a statistical chance of failure, then all you do all you need to do to meet that probabilistic outcome is to create enough occurrences. So I believe in active trading.

And I believe it's important to create as many occurrences as possible in order to be successful. Hence the reason we were successful in the trading floor, we just didn't even know it. But that can be done with other products as well, like stocks, futures, Forex, if you've got it. It cannot be because you cannot create a you cannot create a statistical chance of success that is greater than fifty fifty. So it can't be that. And what if you have a quantitative model that's there's no such thing.

You can throw all those quantitative models in the garbage. They're absolutely worthless. There's never been one. You can never prove to me that there's ever been a successful quantitative model. that's been distributed on any level. It could be now that that doesn't mean there's not high frequency models and that doesn't mean that there's not um there's not prop trading models when you're market making, but there's never been a

customer, institutional or retail that's created a quantitative model that can beat the markets? So the answer is that doesn't exist. That's all crapsh that's all horseshit. I don't really know what to say. Well I mean listen that that's

I've been doing this a long time. That that is the answer and that's the truth. Nobody wants to believe that, but there's no such thing. Artificial intelligence, quantitative modeling, none of it works, none of it exists. Forget fundamental analysis, forget technical analysis. Forget economists. It's all irrelevant. Everything is random. Marketplaces are random. But there are there are different prop models, market making models. That's fine. High frequency models. We all know that.

But there are no other models other than creating the only way to be successful is to create pr that's why hedge funds don't make money. That's why nobody makes money in cyclical markets. And the only time anybody makes money is if benchmarks go higher. Except the tasty trade way, which is which is creating a methodology and having people understand and learn that if you do things that are statistically strong, even though you don't have a theoretical edge. You have a probabilistic edge.

And it's real. Okay. Can you just can you just explain those a little more when you say a statistical edge and a theoretical edge? What do you how do you differentiate those two? So markets are priced there there's no mispricing of markets. So stock markets, futures markets. Forex markets, option markets, everything's priced perfectly. The world prices everything per s perfectly. There's too much capital chasing virtually z risk-free rates right now are zero.

So there's too much capital tracing chasing any return they can get their hands on. So there's no free money out there at all, which means there's a buyer and seller one tick wide for every possible liquid product out there. So there's no edge. So we can eliminate that right away, which is why all quantitative modeling is garbage and everything else. So that brings us to then how do you make money? Well, the way you make money is that the derivatives marketplace overprices fear.

Which means that we charge too much money for fear, and we charge too much money for limited profitability, by definition. So if you're willing to limit your profitability and fear is expensive relative to itself, then for us that's an opportunity. And we consider that completely unique to the methods we've created. And and when I say we've created, they're out there. I mean anybody can do it. Which just means when implied volatility gets really high, we sell it.

And you sell it in the form of selling derivatives so that you have an opportunity to collect time decay as it contracts and it contracts twice as often as it expands. And it's a lot for one s one short podcast, but essentially that's what we do every single day, uh especially now for the last five years. What would you say to those who are

I mean there are traders out there who are making money in other ways. I mean, what do you think that's a you know, a factor of luck or Some of'em lie and some of'em? Some of them are tied to a benchmark so you they guess something. Some of them lie and some of them some of them are outliers. Of course there's people that have been long gold. There's people I mean, nobody's made any money being long the stock market for two years and we're at a record high.

So so if you you know, yeah, sure, if you went out a couple of years ago and you bought you know, you put all your money in Amazon or you put all your money in, you know, Apple or Netflix five years ago, you had a pretty nice run. And if you put all your money in Amazon last year, you had a pretty nice run.

But when you're talking about in general, you know, people don't make money with 50-50 bets. People make money going to Vegas too. But, you know, you know the odds are against you and over time you can't. So so so all we're saying is w we don't care about outliers. We care about um we care about the masses. And if the masses are consumer If the masses are this huge con cons global consumer

then the only way to do it is to put yourself in a position where the statistics favor you. That's it. There's no such thing as people making money because they all of a sudden learnt a new form of technical analysis. Or they figured out they have a great artificial intelligence platform, or they're they're better at reading a balance sheet than somebody else.

You know, once they outlawed insider trading in the US to the eighth degree, you know, none of the hedge funds made any more money. I mean I believe the world of the past world of one hit wonders and some crazy, you know, traitor on some bond desk somewhere or some some uh international desk somewhere, you know, those days of stealing money from your customers are long gone.

Everything's too effectively, too efficiently priced right now. So we live in a world if you want to learn how to make money, you've got to learn how to sell overpriced fear. It's the only it's the only given out there that has a con traction um that has a reversion to the mean characteristic that That works and that's it. And it's not it's not something tricky. It's just this the nature of the beast.

All right, so let's just let's just dumb this down a little bit. You know, I I'm not an options guy myself, so I'm sort of trying to play catch up here a little bit. But you know, selling overpriced fair, what do you exactly mean by that? And also if you could just take it one step further and let's just break down the key elements crucial to successful options trading.

Well here's a couple of things that are crucial. Number one, you need to be you need to be product indifferent, which means you can't you can't worry about, you know, what product you're trading. Number two. You need to be strategy, strategically indifferent.

So so essentially agnostic to strategy. You can't be scared of different strategies. So your product and your your product agnostic and you're essentially strategy agnostic. Now the next step after that is understanding the value of liquidity. So if you don't have like you're in Australia, there is no such thing as a liquid option market in Australia, which stinks because you have to trade in the US. And that's a bummer because of the hours and places like that. But

But there is you have to have liquidity in order to be successful because you have to be able to get in and out. So your product indifferent, your strategy indifferent, and your number one focus is on liquidity. That's just for starters. Then you've got to learn some basic things, which is number one, you've got to learn how to create enough occurrences.

So that you can create the outcome that you're hoping for. Number two, you have to learn how to maximize your success rate, and that happens from managing your winners, not worrying about your losers. That's the next step. And then ultimately, you gotta understand the math behind it and why certain things work. Why is price not mean reverting, but implied volatility is? And then what is implied volatility? You know, is it a factor of what?

It we we know it means expected move, but what drives implied volatility? Why is sometimes implied volatility high and why is sometimes implied volatility low? Place things like that. So all that stuff. Aaron is things you're just gonna have to over time, it just takes, you know, it takes a little bit of work. I mean, we have a few thousand listeners, viewers.

in Australia alone. And just imagine that's uh you know um I mean obviously we used to have a business, I think or some Australia, but um still at Tasty Trade we have a few thousand Australian viewers and it's great and and they get it. It's just it's a tiny sub segment, it's one tenth of one percent of the people out there that that actually trade in Australia.

One of the things you said in there, um, you you spoke about price is mean reverting. No, I said price is not mean reverting. Oh price is not mean reverting. Sorry. Yes. So what exactly does Does that mean when price is not mean reverting? So that means like let's say you had a stock. Let's call it XYZ, all right? And XYZ starts out at twenty dollars and XYZ goes to a hundred dollars. There's no reason there's nothing out there that suggests that XYZ has to go back to fifty dollars.

'Cause'cause at some point fifty dollars may be the average or the mean, you know, and and there's no reason that XYZ has to go back to fifty. XYZ can go to two hundred, XYZ can go to three hundred, XYZ can go to zero. It doesn't mean anything. There's no reason it has to go back to Even though markets are cyclical, there's no reason XYZ has to go back to fifty dollars. But

Let's say XYZ has an implied volatility of twenty, and all of a sudden the im the average implied volatility in XYZ is twenty. And all of a sudden XYZ implied volatility goes to fifty. Now, implied volatility is mean reverting. So at some point in the future, and usually it's the near future, implied volatility in XYZ will go back to twenty, may even go down to ten, and then it will be mean reverting back up to twenty. But the the takeaway here is that you haven't you have an asset class.

That is mean reverting. It's implied volatility. And nobody uses it, or very few people use it for that purpose. That's why it's so valuable. Are you ready to get serious about trading? Then join Tasty Trade, Investopedia's best platform for options trading in 2026. Stocks, options, futures, and more. Tasty Trade has everything you trade all in one platform. Get low commissions, including zero commission on stocks.

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The next thing I'm really keen to ask you about, uh to expand on a little more, because you've you've mentioned it a few times now is it you know, the number of occurrences. So how does the law of large numbers play into your trading and and just Sure. I really w I really like this point. I think it it's very good that you let me give you let me give you a really easy example. So so you go out and um

You go out and you have a handful of pennies, all right, in your hand. You have a handful of pennies. Let's say you have a hundred pennies you're able to hold in two hands. And you throw them all up in the air, right? And now you know over time if you throw 100 pennies, a thousand pennies, ten thousand pennies, whatever it is, if you throw ten thousand pennies or twenty thousand pennies or a hundred thousand pennies, you're gonna be pretty damn close to fifty-fifty heads or tails. Right.

But if you throw up a hundred pennies in the air You may end up with you may end up with 60 or 70 pennies coming up heads and only, I don't know, thirty or forty pennies being tails, and all of a sudden you can go around saying, hey, I'm really good at flipping coins. I can flip as many heads as I want.

Or to give a better example, if there's if there's a hundred If there's a hundred people in a room and each each one of the hundred people has ten pennies in their hand and each hundred people throw up the ten pennies, one of those ten people or one of those hundred people is gonna have ten heads or ten tails. And when that happens, are you going to say, wow, that person's a great coin tosser?

Or you're gonna say, hey, that was just an outlier move, they got lucky, it happened it happened that way. Well in the world of investing, we think that person that got ten heads or ten tails is a genius. And they're not. It's just the statistical chance of coming up with ten heads or ten tails. So the law of large numbers comes into play.

Because if Aaron, the self-directed and trader, goes out and makes twenty trades per year, which is what most customers do around the world, or twenty different investments over the course of the year, which is one or two a month, there's no way you can be long-term successful. But if Aaron, a self directed investor, goes out and does Lots of high probability option trades where you're selling premium and you do 3,000 trades next year, there's a highly probable chance.

that you're gonna come within one or two percent of the exact number of the probability or of the probabilistic outcome that the number of that your pred I'm sorry, your predictable probabilistic outcome. Like this year. I don't know how much money I'm gonna make, but I'm gonna be right approximately 74% and 74.5% of the time. Because that's the average I do with all my trades. Now, that doesn't mean I'm gonna make money. I can lose money and be right 74 and a half percent of the time.

But what it means is that I'll and what it d means to me is that I'll take my chances and that being right seventy four and a half percent of time, I know I can turn that into a winning year for myself.

Mm-hmm. So on average, just so we can put this in perspective further, how many trades would you take in a year? Last year I I don't last year I did 9400. The year before I did 7700. This year, right now I'm on pace to do 10,000. That's just me. I can't speak for other people. And I'm a retail customer using the same technology and the same commissions as everybody else.

Okay. So for So for a retail trader, someone who may not have a a great big account Uh, what would be the minimum account size for this to actually be feasible for someone to do anywhere near that many trades, like factoring all your transaction costs and that sort of thing? Um that kind of trading probably Probably a couple hundred thousand dollars to be fair. Just under fifty thousand dollars. It's between forty five and fifty thousand dollars. That's the average size account.

So for someone who wants to sort of tap into this law of large numbers and really get their trade numbers up, but doesn't have a great big account, uh, you know, maybe a couple of hundred grand. What sort of advice would you would you give to them i in that situation? Well how much money are you talking about? Well

You know, I know a lot of people start out with accounts between five, ten thousand. I mean, I think that's great. And if you can start out with anything like m both my kids started out with accounts, you know. between um two thousand and and eight thousand dollars and I think it's a great learning experience for them and for anybody else. I mean y your goal at that point is obviously

To become more aware. We call it market awareness and clear of the concept. And you start to learn about products and strategies. You start to learn about statistics and probabilities and you start to learn about risk taking and everything else. So I feel like they're infinitely stronger because of all of that.

But um, you know, you'll start off with spreads mostly and and and lower probability of success. It's harder to make money. This is a this is this is a business that um there there's parts of it that are that are very much nonlinear and when you talk about small amounts of capital, um, although you can create much better statistical returns

It's it's more difficult. There's certain limitations. But I think that the that the consequences of starting young and starting small are invaluable um and the mistakes are well worth it. Let's put it that way.

Now when you talk about statistics and probabilities, what sort of level of math is required to be able to come up with these numbers? We have two things we say here, Aaron. Two things. One, if you can play black can you play blackjack? I've never played blackjack, no. Okay, well if you played blackjack or craps you can do it with your eyes closed. And we have an old saying here at Tasty Trade, if you can order a pizza and I know you can order a pizza, if you can order a pizza, you can trade.

It's not rocket science. eighths and sixteenths and thirty seconds and it was a little bit more complicated. Right now we've reached the point where it's none of the above. I mean it's all decimalized. It's it's it's pretty much industry standards for everything. This is not Hard stuff. We have we have a solid hundred thousand plus tasty traders and in the world of tasty trade it's a um

Uh you know, I mean we've just scratched the surface. So so I think, you know, we gotta give people a lot more credit for the average level of intelligence out there and globally. I mean we are a very smart s society and we do not challenge ourselves. One of the things that we say here all the time is we need to create more intellectual challenges.

You know, we have way too many people playing Pokemon and not enough people challenging themselves intellectually with respect to finance. And that's our goal. Challenge you intellectually, never dumb it down. Make it as hard and complex as possible and never let our foot off the gas pedal. Now I think it might be really interesting to hear about your logic for entering, you know, trades. Considering you take, you know,

anywhere between seven thousand to ten thousand trades in any given year. What's your logic for entering these trades? Like what's that based upon? It's all mechanics. It's all mechanics and opportunity. We look for um w we're contrarians. So we look for price extreme. That's just that that's not because there's any edge to to price extreme. There's no edge to being a contrarian in that in a true sense. The the the the uh The reason we do it is because

it engages us and it gets us involved in the in the making of a trade. So one of the things we do is we're contrarians by nature. Um, we love the the counterparty to the trade aspect of, you know, of taking the other side of what everybody else wants to do. So when the world's long we're short. When the world's short, we're long. That kind of thing.

Um that's one thing. That's the engagement side. The other side is, you know, it's all based on strategy. It's based on the amount of decay we've created for ourselves daily. It's based on the amount of occurrences. We're always engaged. We're always involved. and and it's it's hard to explain until you get get it going at that level. But You know, what we do this is

This is not hardcore trading for the prop traders, for the professionals. We are strictly 100% retail. No institutions, no prop traders, none of that stuff. But this is all retail consumer trading and we think everybody's capable. It's just an intellectual challenge. I would have given you a different story twenty-five years ago.

Twenty-five years ago there was opportunity, there was a different kind of opportunity. The markets were wide. They were inefficient. You could drive a truck through through markets twenty-five or thirty years ago. So but that market ston't those markets don't exist anymore today. And if you're going to trade in today's markets, and you're going to trade as an individual investor, you are not disadvantaged to the professional marketplace.

Okay, you're not disadvantaged at all. You have better technology, better content, and and your fees are almost exactly the same. So your disadvantage is know how. If if you don't have the know how you can't compete. Absolutely.

Now, one of the things that a lot of traders are are very much into and some even say that it's, you know, maybe ninety percent of the challenge, is trading psychology. Uh I understand you feel very differently about this. Can you give us your take? Psychology is a hundred percent bullshit. It's people like to we we're enablers. Our society is is, you know, we we've created a society of enablers and so we make people feel feel good about their inequity.

financial abilities, their lack of know-how, it's it's not because they don't have the right, you know, um trader psychology or or they're not seeing the right trader psychologist. It's because and most of the people that are trader psychologists that I've ever run across have have would have zero value in my world. This is not a, you know, right brain, left brain type thing. The reason people aren't successful is because they don't take the time and the commitment to be successful.

That's all it is. And I'm tired of enabling people and and making trying to make everybody feel good when the industry is conflicted by by the by the true sense this industry makes money. by managing other people's money and by selling people money and by selling fear. And the only way to get around that and to change that culture is to develop the know-how yourself.

And ninety-nine percent of the people are unwilling to develop that know-how. So the idea that there is some trader psychology out there, it's complete bullshit. But I mean even operating like a mechanical strategy or being very quantitative in your approach, uh do you think that there is a certain degree of psychology, even though it's not nowhere near ninety percent, um do you think that there's a small part of it that that does come down to your psychology. No, I think that's mechanic.

It's like anything else. It's almost like breathing. I think there's a I mean listen, if you're talking about ego, that's fine because you know Everybody has egos. If you're talking about, you know, risk taking and things, I don't consider that part of your quote psychology. I consider that all part of your mechanics. Now if you want to if you want to consider psychology mechanics, then then sure, but I don't. And and I think this is a this is a

Um this is a game that, you know, that comes down to comes down to mechanics. You said before you didn't play blackjack. I don't believe blackjack is a game that has there's there's a psychological element to blackjack. Just like I don't even believe there's a psychological element to

Um, you know, to to any card game, even poker or you know, or craps or anything else. I mean I know people argue that there is in poker, but if you've ever watched poker players, most of them play by the book. And and when you're playing any other kind of game, it is straight by the book. So And now we're starting to see even sports. has become you know a game of mechanics. We used to say, Oh this is a little bit more.

This head coach or this manager is a genius because he made he pulled the right string or made the right move at this time. And the reality right now is everything is becoming part of saber metrics and statistics and and of course it's gonna go that way because ninety ninety-five percent of the time, that's gonna win every time.

So no, I'm I'm poo-pooing the whole psychology aspect to it and I'm suggesting that it's a lack of know how, it's a lack of desire, and until we get people willing to take on that intellectual challenge, you know, we'll we'll We'll give ourselves a crutch and call it psychology. Okay. Sure things.

I said a little earlier that I'd like to I'd like to pick up on uh you know your days of starting uh think or swim. So uh just you know obviously changing subject a little bit, what motivated you to start Well, you know, we were standing in the same pit for twenty years and in about a two f I I didn't move.

from a I had a two foot spot for twenty years, you know, basically. Um and at some point when we saw the markets changing, we're like, you know, it's almost like You kind of see the hurricane coming and you're you're like, I'm gonna be the first one out of here, not the last one out of here.

And essentially that's what I did. I decided I wanted to be the first one out and I luckily had had a good career and had made, you know, enough money and I rolled the dice and and uh with my trading partner at the time, Scott Sherden, we decided to build um think or swim. We didn't exactly know what we were doing, but uh we hired some really smart technologists and and we We you know, we messed around and figured it out over time and

Um, we loved it. It was one of the greatest experiences of my life until Tasty Trade. Mm. And I mean it was such a huge success. Um I mean, what do you think were the maybe the underlying factors for why it was so well received? Um we hired very smart people that um this is, you know, uh we we had a vision and it was a it turned out to be a great vision, but at the time I didn't know. Um but we had a vision and we hired people that were able to execute our vision rather than change it.

And and and we got lucky, you know. And when I say we got lucky, listen, it was a ridiculous amount of hard work. I didn't see my family for ten years. You know, so it wasn't like it wasn't like we just said, Okay, here's an idea, now you guys go build this. I mean we it was a it was total sweat equity and and I worked my you know, I worked my butt off for for ten straight years. You know, I was traveling, never came home, working overnight with developers, you know.

you know, working with clients it was a it was a brutal challenge and, you know, lots of ups, lots of downs. Um We made breaks for ourselves and you know and and it worked. We built a great company, a great product. We we we actually cared about the customers, every single one of them. I wouldn't trade my my floor trading experience and I wouldn't trade my thinkersom experience. for anything and I didn't want to sell Thinkorswim.

But we lost the company'cause we were public and And uh we lost it to a buyout from T D D Meritrade and And we built Tasty Trade and I wouldn't take I wouldn't trade Tasty Trade for anything now. Okay. So I had no idea about that. So you you kind of lost the company more than actually you made a conscious decision. Well, I shouldn't say we lost it. We sold it for three quarters of a billion dollars. So it wasn't like a bad trade.

You know, I mean I mean we we got paid, right? So I mean we created a billion dollar company basically and and um and that's pretty impressive in a business where, you know, we were just a bunch of floor traders. So so I'm I'm ecstatic with what we were able to do and you know, I'm really proud of the accomplishment. It was a it was a major um you know A lot of people work their butts off to get places and sometimes it works and sometimes it doesn't and

For us, you know, it it worked and it was it was um it was pretty special. Yeah. Now that's massive.

So tell us a little bit about Tasty Trade, like what's the vision for Tasty Trade? What sparked that idea? What's going on there? When we sold Fingerswim, um You know, I was working for T D'cause I had a contract for a couple of years to to finish out my career. And I went to the CEO of T D Meritary. I said, you know, I his name was Fred Tomzak, he's a great guy. And um and I said, Fred I love you guys and I love think or swim, but I can't work here, you know, like

This is this isn't this is my hell. It's conference calls, it's uh it's meetings, it's conference calls, it's a it's a big company and and I like to run my own show. And I said to him, Oh my god

Fred, am am I gonna be the CEO of T D D Ameritrade someday? And he goes, Not a chance in hell, Tom. So I go, Okay, then I gotta leave. And uh um And I said, but I'm gonna go build another firm and you know, I'd love to work with you guys and so we we sat down and we sketched it out and and I said, I'm gonna I'm gonna build you know, first I built the technology and now I'm gonna build the content and I wanted Tacey Trade to be the content

that allowed people to go to another level. And it it took us a couple of years to figure everything out and to learn how to build a media company and and everybody told us we couldn't do it. We couldn't compete with um we couldn't compete with T D we couldn't compete with CNBC. We couldn't compete with Bloomberg

We couldn't compete with anybody, you know, and I don't even know today if we don't have a bigger audience than all of those than all they all do. I know we have more active traders than they all have, and we have the largest active trader audience in the world. And um And and we've been profitable basically since day one and I feel, you know, really good about what we built. It's a it's a beautiful company. It's um

The we're a think tank and it's the coolest thing I've ever done. So it's wild. Now n I don't know, I think it was maybe last year or the year before you m you made a series on Tasty Trade uh with your daughter Case. uh to teach her how to trade, which I thought was really cool. So

I mean, what was that whole experience like and where did you even begin to start, you know, with teaching um your own daughter, like someone in your own family like that? Well, Case is my firstborn so And and when she got out of college, you know, she went to work for a startup in Chicago and it was a small start up with just a couple of people and you know, I was like I wasn't sure if they were gonna make it or not, but I thought it was a great experience for her.

And when a job opened up here at Tasty Trade, I'm like You know, I'm like I talked to her and I'm like, listen, you have a chance to you know, we're a young firm and you have a chance to, you know, to really um to really learn and to learn stuff you might never have done before and I would love, you know, it would be a dad's dream come true to

have an opportunity to, you know, work with you, spend time with you, work with you. It'd be cool as hell. I mean, I couldn't think of a better thing in life, you know. So So she's like, All right, I'll give it a try. And and when we were sitting there about a year or two after she was working, I said, Let's do a series. I'm gonna teach you to trade. And case is not your um case is

sarcastic, she's snorky, she's uh she's not a yes person at all. And and she's um I mean we have a great relationship but but uh resistance and uh she asked some questions and she was a true beginner. I mean, there was no you know, she had never made a trade before. And and uh she you know, she had very mixed results, but she still trades to today. So she's trading, um she's trading even actively as of today. So I did something.

Yeah, yeah. I'll put a link to that series uh in the show notes if anyone wants to check that out. It's very cool. So uh Tom, I just got a few more questions here that came through from members in uh the Chatwith Traders Facebook group. Uh so we'll just run through a couple of those. So one here was um what advice do you have for those who want to trade for a living? Go for it.

I mean it's hard. You have to make sure you're you have to have the capital. You have to know you have to know what you're doing. It's If you're in Australia, I don't know where your where your um you know where your listeners are and everything like that. It's it's a little more difficult because of the hours and and the scheduling and things like that and and the fact that there's no really domestic markets.

Stay away from pure black and white products. If they don't have underlying derivatives like options, be very careful. make sure you have enough capital. You know, you have to really be in tune with some of the stuff I talked about, which is managing winners. Don't think you can do it through technical analysis. Understand all the products and and and stay small.

The key is staying small. And if don't ever forget that you have to stay small. I don't care how many years you've been doing this. One of the biggest turnarounds for me ever in trading was realizing that I was always trading too big and I needed to get smaller. And so it's a huge, huge benefit.

Um and I think that's that you know, I I I I would never discourage somebody from doing what they want to do. I think it's it's had I've had a great life because of trading and it's changed the way I think about you know, lots of things and businesses and everything else and I would be I would be it would be very unfair to me to say to anyone that you shouldn't do this or try this or you can't do it because I don't believe that. I think you can. Awesome answer. I love it.

Uh another question that came in, do you have any tips for hedging or spreading options? Well We call it adjusting or defending. I mean generally you don't um uh there's no such thing as hedging in my world, but there is such a thing as reducing basis. So one of the things that we do is whenever you own an option, you sell something else against it. Whenever you own anything and you have the opportunity to sell something else against it, you do.

If you have an ab if you have the ability to reduce basis, you do it at any cost. Meaning it's it should be your first mechanical endeavor. No matter what you own, if you own a uh a ballpoint pen and you have an opportunity to reduce the basis on that ballpoint pen, which is the cost of that pen, then you do it because you have a higher statistical chance of success.

If you're able to do that. And before somebody says, but you're limiting your profitability, who cares? The key to success is limiting profitability to reduce your basis, to reduce your costs, and improve your probability of success. So that's the answer to that question.

You don't you don't do something to immediately hedge it, but you do lots of things to reduce your basis. Well, thank you very much for doing this, Tom. Uh before we before we wrap this up, do you want to share with listeners where they can go to find out more about you? Where's the best play? Well the only place they can find more about me right now is at Tasty Trade dot com. We are a free site. We're available to anybody anywhere in the globe.

Um Tasty Trade is eight hours a day of live content. The archives are free. The content is free. Um it's an amazing product. I think it's the best financial product in the world. And uh enjoy. Just watch it. There's more information on there. There is there's a million hours of information on there, just an incredible resource. For trading, for investing, for fun. You know, we have fun. And uh we have um forty different shows, eight hours a day live. I think there's

sixteen or seventeen different people in house that that produce the content and we're a a small firm of eighty people located in Chicago, Illinois. And um Enjoy. Sure thing. Tasty Trade.com, make sure you guys check it out. Tom, once again, thanks so much for doing this, man. I I hugely appreciate it. It's been uh very interesting speaking with you. That's awesome, Aaron. Thank you so much.

Hey folks, Aaron here. Just a quick word following on from the episode. I hope you really did enjoy it, even if you perhaps didn't agree with everything Tom was saying. I know he did make some pretty bold claims, but You know, that's cool. He's obviously got his reasons for thinking this way and we all have to find our own path. Um, you know, that that's something we've heard before uh many times over.

Like I said, I do kind of regret not pushing him for a little more depth on some of those statements, but anyway. As I mentioned right at the beginning, for the first time, chat with traders, T shirts and even hoodies are available right now. These are only available for a limited time though, until the second of September, so don't sleep on this.

get on over to chatwithraders.com forward slash t-shirt to pick up a t-shirt or even a hoodie. There's two designs to choose from and each item is printed on American apparel. So they're very comfy to wear and awesome quality. Again, the link you need to go to is chatwithraders.com forward slash t-shirt. There's no dashes. Um, it's just plain chatwithstraders.com forward slash t-shirt.

Hope you like them. Feel free to hit me up on Twitter if there's anything you want to chat about at ChatwithTraders. Otherwise, I'll catch you next week. You've reached the end of this episode of Chat with Traders, but rest assured there are more episodes.