By Far, the 3 Best Trading Strategies — Transcript

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1. 0:00In 45 years of daily trading, I've tried
2. 0:02every strategy. Looking back, nearly 2/3
3. 0:05of my returns have come from just three
4. 0:07strategies. I'm Tom Sosnoff. I've made
5. 0:09over a million trades in my lifetime,
6. 0:10and I've founded two revolutionary
7. 0:12billion-dollar trading firms. I'll show
8. 0:13you how I'm using these strategies in my
9. 0:15own portfolio. This video will get a bit
10. 0:17technical, so I created a free
11. 0:19interactive trading guide fitted with
12. 0:21the specific strategies discussed in
13. 0:23this video. That's also the source of
14. 0:26the graphics in this video. Click on the
15. 0:27top link in the description to get
16. 0:29access. It's completely free. Let's get
17. 0:31started. Number one, naked short puts.
18. 0:34Many trading strategies exist. None have
19. 0:37a true theoretical edge, but many have a
20. 0:40mechanical edge. When I'm asked what is
21. 0:42my favorite strategy, I generally say
22. 0:43short strangles. However, when I'm asked
23. 0:46what is my most successful and most
24. 0:48important strategy, it is easily the
25. 0:50simple naked short put. Selling an
26. 0:52out-of-the-money short put is not only
27. 0:55probabilistically strong, it is also my
28. 0:57favorite option strategy for capital
29. 0:59efficiency, pricing skew, ease of
30. 1:01execution, and adjustability. A naked
31. 1:03out-of-the-money short put is a pure
32. 1:06long delta position. It has limited
33. 1:07profitability and unlimited risk. That
34. 1:10sounds crazy until you hear that it has
35. 1:13a high probability of profit. We
36. 1:14generally aim to sell around the 25
37. 1:17delta put, which is just outside the
38. 1:19expected move and has over a 75% chance
39. 1:22of success. The buying power requirement
40. 1:24is approximately 20% of the underlying
41. 1:27short strike price, and the ideal
42. 1:29duration is 45 DTE. That's the optimal
43. 1:32point in the decay curve. I prefer the
44. 1:35naked short put over other simple
45. 1:37strategies because the market's positive
46. 1:39drift also works in my favor. The ease
47. 1:41of execution, capital efficiency, and
48. 1:44the simplistic mechanics are all
49. 1:46positives. But the real reason I love
50. 1:48this trade is because it builds a
51. 1:50culture of learning to win. The naked
52. 1:52short put is a case study in
53. 1:55foundational wealth creation. It is a
54. 1:57practical way to experience
55. 1:59the power of the law of large numbers.
56. 2:02It is statistically the most impactful
57. 2:04way to improve your decision-making
58. 2:06speed with the least theoretical give up
59. 2:09or losses due to bid-ask differentials.
60. 2:11As a contrarian, I will argue that the
61. 2:13best time to sell a naked put is when
62. 2:16you believe a stock is cheap and its
63. 2:18implied volatility is high. A stock
64. 2:20being cheap is subjective, but high
65. 2:22implied volatility can be measured by
66. 2:23IVR. So, low basis, lots of liquidity,
67. 2:27and high IVR, that's your sweet spot.
68. 2:30Number two, credit spreads. When most
69. 2:32people learn about options, and
70. 2:33specifically credit spreads, they love
71. 2:36the idea of defined risk. It's one of
72. 2:38the special aspects of trading option
73. 2:40spreads. The fun part is that credit
74. 2:42spreads can be bullish, bearish, or used
75. 2:45as neutral strategies. Credit spreads
76. 2:47are also high-probability trades.
77. 2:49They're very liquid, and they are
78. 2:51extremely capital efficient. Personally,
79. 2:53I like credit spreads because they allow
80. 2:55you to be inexpensively directional with
81. 2:58high-priced stocks. They are also not
82. 3:00especially volatile or durationally
83. 3:02sensitive. A credit spread involves
84. 3:04selling an option closer to the stock
85. 3:06price and buying a cheaper, further out
86. 3:09of the money option to cap the risk.
87. 3:11Although it sounds like options 101,
88. 3:13credit spreads remain the most popular
89. 3:15defined risk option trade for me, too,
90. 3:18to this day. The perfect mechanics for
91. 3:20setting up a credit spread involve
92. 3:22placing your short strike just outside
93. 3:24the expected move and widening the
94. 3:26strikes to collect between 25% and 33%
95. 3:29of the width of the strikes. Another
96. 3:31nice feature of credit spreads is
97. 3:33knowing your buying power when setting
98. 3:35up the strikes. Simply put, the BPR, or
99. 3:38buying power, is the width of the
100. 3:40strikes minus the credit received. As
101. 3:42for your probability of profit, it's
102. 3:44100% minus the percentage of credit
103. 3:47collected. The easy math and the
104. 3:49simplicity of the strategy make credit
105. 3:51spreads my top recommendation for retail
106. 3:54traders transitioning into premium
107. 3:57selling. I favor credit spreads that use
108. 3:59monthly options rather than short-term
109. 4:01weekly options. That said, for people
110. 4:04who like to trade zero DTE SPX options,
111. 4:07credit spreads are the default choice of
112. 4:09almost every DIY investor. Credit
113. 4:13spreads can also be used in combination
114. 4:15with other credit spreads to create
115. 4:16things like butterflies, not naked short
116. 4:19puts for Jade Lizards or opposing credit
117. 4:22spreads for iron condors. Number three,
118. 4:24let's talk about covered calls. This is
119. 4:27the granddaddy of traditional option
120. 4:29strategies, but I view covered calls
121. 4:31differently from mainstream retail
122. 4:33brokerages. Covered calls have long been
123. 4:35pitched as the classic income strategy.
124. 4:38I have long argued covered calls are
125. 4:40primarily cost basis reduction mechanics
126. 4:43used to lower the overall risk of
127. 4:45holding long stock. When I look to
128. 4:46maintain long delta and I want more
129. 4:48upside than a naked short put, I use a
130. 4:52one-to-one covered right, long 100
131. 4:54shares for every one short call. I like
132. 4:56to explain covered calls as the strategy
133. 4:58to use when the cost basis is low and
134. 5:01implied volatility is high. In other
135. 5:03words, fear and option premium are
136. 5:05expensive while the stock price is
137. 5:07subjectively cheap. That's the ideal
138. 5:09scenario. We usually choose around the
139. 5:1130 delta. I always sell out of the money
140. 5:13calls. If we're right about the
141. 5:15direction, this usually leaves enough
142. 5:17room for the stock to appreciate while
143. 5:19collecting an impactful amount of
144. 5:21premium to offset the downside risk. The
145. 5:23optimal duration for covered calls is
146. 5:25around 45 DTE, 45 days to expiration.
147. 5:29Similar to naked short puts, this
148. 5:30timeline captures the accelerating curve
149. 5:33of options time decay, which is called
150. 5:35theta, without exposing the trader to
151. 5:37volatile swings of short-term or zero
152. 5:39DTE contracts. What seems to confuse
153. 5:42investors most about covered calls is
154. 5:44the active management of the trade.
155. 5:46Similar to virtually all other option
156. 5:47strategies, collecting at least 50% of
157. 5:50the out-of-the-money premium received is
158. 5:52the objective. Lots of passive investors
159. 5:55like to hold the short call until
160. 5:56expiration. However, the rule of thumb
161. 5:58is to manage the winning short call
162. 6:00early by buying it back when it reaches
163. 6:0250% of its maximum profit. You can then
164. 6:05roll it out to a new cycle to continue
165. 6:07chipping away at your stock's cost
166. 6:09basis. I prefer this approach sometimes
167. 6:12over a more capital efficient naked put
168. 6:15strategy because it bumps the raw
169. 6:17probability of a standard stock
170. 6:20investments' profit from roughly 54% to
171. 6:23around 64%. These increased
172. 6:25probabilities result from managing a
173. 6:28winning short call early by buying it
174. 6:30back when it reaches 50% of maximum
175. 6:32profit. You can then roll it out to a
176. 6:34new cycle to continue chipping away at
177. 6:36your stock's cost basis. I promised that
178. 6:38I would share the role and exposure
179. 6:40these three strategies have in my
180. 6:42portfolio today. Let's talk about that.
181. 6:45First, naked short puts has been
182. 6:47probably the best strategy of the last,
183. 6:48I don't know, since I started this
184. 6:50business in the early '80s. Yes, they
185. 6:52have their moments and they can bite
186. 6:54you. If you keep your size small and
187. 6:55your positions diversified,
188. 6:57>> [music]
189. 6:57>> you can generally use this strategy from
190. 6:59now into perpetuity and it'll be your
191. 7:01favorite strategy. It's just something
192. 7:03that, you know, it's the highest
193. 7:04probability of profit, essentially the
194. 7:06least amount of risk based purely on
195. 7:08probabilities. My favorite part of naked
196. 7:11short puts is finding stocks that are
197. 7:14oversold with high implied volatility or
198. 7:16high implied volatility rank. My
199. 7:18preference is to sell
200. 7:19>> [music]
201. 7:19>> anywhere between the 16 and 25 delta
202. 7:22strike and keep your size small and
203. 7:24don't average down. Meaning, if you're
204. 7:26wrong, just let it play out. And maybe
205. 7:28you want to sell a call against it,
206. 7:29maybe you want to roll out in time if
207. 7:31you're wrong. But, if you're right, is
208. 7:33taking profits whenever the stock has a
209. 7:35contrarian move or a a move in the
210. 7:37opposite direction and you have an
211. 7:39ability to take profits, take some
212. 7:40profits. Second, credit spreads. I use
213. 7:43credit spreads a ton. I mostly use
214. 7:46credit spreads for my own trading when
215. 7:48I'm trading index products, for example,
216. 7:50like SPX, QQQ, SPY, and I use a lot of
217. 7:54out-of-the-money call credit spreads.
218. 7:57Put credit spreads in index products and
219. 7:59ETFs tend to trade cheap because of the
220. 8:03implied downside skew. But to the
221. 8:05upside, they tend to trade a little
222. 8:06expensive because the velocity of risk
223. 8:08is to the downside, not the upside. So,
224. 8:11what I like to do is sell
225. 8:12out-of-the-money call credit spreads
226. 8:15just outside of the expected move.
227. 8:18Usually, you collect a little bit less
228. 8:20than 1/3 of the width of the strikes,
229. 8:21right around 20 to 25% of the width of
230. 8:24the strikes. What I like about this is
231. 8:26when you look at the expected move of
232. 8:27most underlying indexes or ETFs, you
233. 8:30usually have a number of chances over a
234. 8:33reasonable duration for that trade to be
235. 8:35profitable. They're not trades [music]
236. 8:37that are necessarily going to work
237. 8:38overnight. They're trades for grinders.
238. 8:40And they're trades that come in slowly
239. 8:41over time, or they're trades, you know,
240. 8:44that are pure delta. Just think of it
241. 8:45that way. Covered calls. I love the
242. 8:47covered call strategy. It's less
243. 8:49attractive to me when the market's at
244. 8:50all-time highs like it is now, and a lot
245. 8:52more attractive when the markets are
246. 8:54pulling back or selling off, but there's
247. 8:56still plenty of stocks out there that
248. 8:58are reasonable in price. You don't want
249. 9:00to do covered calls on super expensive
250. 9:03stocks cuz it just ties up too much
251. 9:04capital. But if you find a stock that
252. 9:06has, let's call it, two or three star
253. 9:08liquidity, where you find a stock that's
254. 9:10somewhere between, let's say, $10 and
255. 9:13maybe 75 or $80 or $100, those are
256. 9:16covered call candidates. You generally
257. 9:18want a stock that has a reasonably high
258. 9:21implied volatility, because otherwise,
259. 9:23not getting enough bang for taking the
260. 9:24risk. But what you want with the covered
261. 9:26calls are stocks that have sold off,
262. 9:28stocks that you believe are cheap,
263. 9:30stocks that have decent volatility, just
264. 9:32like a just like a naked short put. But
265. 9:34you also want stocks that maybe have a
266. 9:36little bit less liquidity, maybe stocks
267. 9:38that you feel like the stock itself is
268. 9:41more liquid than some of the options in
269. 9:43there, and also something that you don't
270. 9:45mind owning. And so, like something
271. 9:47that's a little less expensive, because
272. 9:48I think it's important to break
273. 9:50portfolios down, to have some stocks,
274. 9:52let's call it like 10 or 20% of your
275. 9:54portfolio in stocks, let's call it
276. 9:57something like 10 or 20% of your
277. 9:59portfolio in short credit spreads, and
278. 10:03maybe something like up to 40% of your
279. 10:05portfolio in naked short strangles
280. 10:07[music] and or short puts. I look
281. 10:09forward to your comments on this video.
282. 10:11I try and read everyone, and I respond
283. 10:13to as many as I can. Thank you for
284. 10:15watching.