Building an Options Portfolio For 2025

This video provides a comprehensive guide to constructing an efficient and diversified trading portfolio for active traders. Tom Sosnoff emphasizes product indifference, focusing on capital efficiency across various asset classes, including stocks, futures, and options. He advocates for non-correlation to minimize volatility and reduce outlier risk. The session covers practical strategies such as optimizing trade size, leveraging beta-weighted deltas, managing risk through dynamic hedging, and understanding the significance of expected moves and probabilities of profit. Sosnoff also highlights the importance of consistent mechanics, portfolio diversification, and adhering to sensible capital allocation to succeed in active trading. The presentation combines educational insights with actionable advice, tailored for traders aiming to enhance their decision-making processes and portfolio performance.

🔍 About Tom Sosnoff

• Market-making career began in the 1980s at the Chicago Board Options Exchange.
• Co-founded Thinkorswim and Tastytrade, leading platforms in trading and education.

🌟 Goals of the Webinar

• Discuss building an efficient portfolio focusing on products, capital efficiency, and directional strategies.
• Emphasis on diversification and risk management.

📦 Product Mix

• Importance of including stocks, options, futures, and digital assets for diversification.
• Portfolio allocations: ~20% equities, ~20% futures/options, ~50% listed options.

💰 Capital Efficiency

• Use products with high leverage and low buying power reduction to optimize capital usage.
• Strategies like pair trading and dynamic hedging reduce risk while maintaining flexibility.

🔗 Non-Correlation and Volatility

• Combining non-correlated assets (e.g., stocks, bonds, commodities) reduces portfolio volatility by ~35%.
• Introduce futures alongside equities to lower risk and improve efficiency.

📉 Reducing Outlier Risks

• Smaller positions in diversified underlyings cut outlier risks by 90%.
• Actively manage positions to adapt to market conditions.

⏳ Decay Curve

• Focus on the “optimal decay” point (24-45 days to expiration) to maximize returns.
• Early management of positions reduces risk and provides more strategic flexibility.

📈 Basis Reduction

• Use options and spreads to lower the cost basis of positions, improving profitability and risk-adjusted returns.

⚙️ Law of Large Numbers

• Success in trading hinges on high-frequency, consistent strategies.
• Achieve statistical reliability with hundreds to thousands of trades annually.

🔀 Dynamic Hedging

• Balance leverage and flexibility using options and futures for position adjustments.
• Emphasize managing size and reducing capital allocation to trades.