Tom Sosnoff's Trading Strategies: High Probability, Small Gains

Tom Sosnoff builds his trading strategies around statistical probabilities. He favors trades with a high likelihood of success. This often translates to selling options rather than buying them.

Selling Premium

Sosnoff primarily sells premium. He focuses on out-of-the-money (OTM) options. These options have a lower probability of expiring in the money. Selling OTM calls and puts generates income. He uses credit spreads extensively. A common strategy involves selling a call spread or a put spread. For example, he might sell a 40-strike call and buy a 45-strike call. This creates a credit spread. The goal is for the underlying asset to stay below the short call strike. He collects the initial credit if this happens. He applies similar logic to put spreads.

Defined Risk

Sosnoff always defines his risk. He avoids naked options positions. Credit spreads inherently define risk. The long option limits potential losses. For example, in a 5-point call spread, the maximum loss equals the width of the strikes minus the credit received. If he sells a $40/$45 call spread for $1.50, his maximum loss is $3.50 per share. He understands his maximum exposure before entering any trade. This contrasts sharply with unlimited risk strategies.

Short Duration Trades

Sosnoff prefers short-duration trades. He targets options with 30-60 days to expiration (DTE). Shorter durations accelerate theta decay. Theta decay benefits option sellers. The time value of options erodes faster as expiration approaches. This decay provides an edge for premium sellers. He avoids very short-term options (under 10 DTE) due to increased gamma risk. He also avoids very long-term options (over 90 DTE) due to slower theta decay.

Volatility Skew and Implied Volatility

Sosnoff exploits volatility skew. Implied volatility (IV) often differs between OTM calls and puts. He looks for opportunities where IV on OTM options is elevated. He sells options with higher implied volatility. High IV inflates option premiums. Selling inflated premium increases the credit received. He constantly monitors the VIX. High VIX environments offer more premium to sell. He adjusts his strategies based on IV levels. He becomes a more aggressive seller when IV is high. He reduces exposure or trades smaller when IV is low.

Iron Condors and Strangles

Sosnoff frequently employs iron condors and strangles. An iron condor combines a call credit spread and a put credit spread. This strategy benefits from the underlying staying within a defined range. For example, he might sell a 30/35 put spread and a 45/50 call spread on a stock trading at 40. He collects premium from both sides. The maximum profit is the total credit received. The maximum loss is defined by the width of the spreads. Strangles involve selling an OTM call and an OTM put. This strategy profits if the underlying stays between the strikes. Strangles have unlimited risk if left naked. Sosnoff typically converts strangles into iron condors by adding protective long options. This caps the risk.

Managing Winning Trades

Sosnoff manages winning trades proactively. He often closes trades early. He aims to capture 50-75% of the maximum profit. He does not wait for options to expire worthless. Closing early reduces exposure to gamma risk. It also frees up capital for new trades. For example, if he sells a credit spread for $1.00, he might buy it back for $0.25-$0.50. This secures a profit and eliminates further risk. This approach prioritizes capital efficiency and risk reduction.

Managing Losing Trades

Sosnoff manages losing trades decisively. He defines a maximum loss threshold. He closes trades that hit his stop loss. He avoids letting small losses become large ones. For a credit spread, he might close the trade if the loss reaches 1.5x to 2x the credit received. For example, if he collects $1.00, he closes the trade if the loss reaches $1.50-$2.00. He does not hesitate to take a loss. He believes in cutting losses quickly. He rolls positions under specific conditions. He might roll a losing put spread down and out for a credit. This extends the duration and potentially reduces the break-even point. He only rolls if it improves the probability of profit or reduces risk. He avoids rolling purely to avoid realizing a loss.