If You Master Volatility, You Master Money

0:00If you don't understand volatility,

0:02you won't understand how to win in life.

0:04I'm Tom Sosnoff, and I've made a career

0:07and built two billion-dollar businesses

0:09>> [music]

0:09>> on the simple idea of capitalizing on

0:12volatility. I promise, this will be one

0:14of the most important pieces I've ever

0:16done. But first, we need to understand

0:18what volatility actually is. The

0:20simplest way to explain volatility is

0:23that is the best vehicle for setting

0:25reasonable expectations about

0:26everything. Understanding volatility in

0:28its rawest, most [music] practical, and

0:31applicable state will change the way you

0:32think about trading, investing, taking

0:35risk, and building wealth. Volatility is

0:37essentially the expected move. It's an

0:39accurate measure of probability and

0:41risk. Lastly, unlike price, volatility

0:43is a statistical measurement with

0:45certain mean-reverting qualities. And

0:47mean reversion without short-term time

0:49restraints is an opportunist's dream.

0:52I'm going to show you the four key

0:54reasons why embracing volatility will

0:57help you build wealth.

0:58The last reason explains why embracing

1:00volatility is more than simply a better

1:03way to build wealth. It's also a better

1:05way to approach life. Let's get started.

1:07Reason number one, opportunity is rarely

1:09obvious. To take advantage of

1:11mispricing, whether it's emotional or

1:13structural and caused by whatever

1:15reason, we need to understand that only

1:18comparative volatility pricing can give

1:20us the confidence to make a trade. When

1:22volatility is high and the market's

1:24panicking a bit, asset prices can, for a

1:26short period, drop below their intrinsic

1:29value or get way too expensive relative

1:31to their true value. When markets

1:33disconnect from some form of reality,

1:36that's when real money can be made. This

1:38type of situation happens in virtually

1:41every market, from stocks to real estate

1:43to alternative assets. Measuring

1:45volatility in listed markets is also

1:48relatively easy. In non-listed markets,

1:50it's more challenging, but can still be

1:52done by establishing an estimated price

1:55range. Here are some real-life examples

1:58of valuation mispricing that have

2:00happened to me. I live in Chicago and

2:02I've never made any real money buying

2:04real estate in this city because I never

2:06bought any properties that were trading

2:07cheap relative to their trading range. I

2:10always bought out of want but never for

2:13opportunity. When I invested in

2:14financial assets that I thought were

2:15cheap due to high volatility and market

2:18capitulation or sold when I thought they

2:20were expensive due to hype and extreme

2:22volatility. Those investments were

2:24always big winners. We have built, sold,

2:26bought back and sold again financial

2:28assets for hundreds of millions of

2:30dollars simply because we understand

2:32volatility. We also understand that

2:35counterparties make emotional and

2:37impulse buys and that's where the

2:39opportunity lies. Reason number two.

2:42Volatility detects systemic

2:44vulnerabilities. It is difficult to

2:46detect structural weakness within your

2:48investments without understanding

2:50volatility. It is virtually impossible

2:52to assess your portfolio upside or

2:54downside without understanding where the

2:56opportunity is coming from. For example,

2:59you can't create a portfolio of utility

3:01stocks and expect asymmetric upside. On

3:04the [music] other hand, you can't build

3:05a portfolio of quantum and crypto stocks

3:08and not understand that with unlimited

3:10upside comes a significant amount of

3:12downside risk. [music] Sustained bull

3:13markets can fool a lot of professional

3:16and do-it-yourself investors. They can

3:18hide poor portfolio management practices

3:21[music] and a poor understanding of the

3:22expected move. But when volatility

3:24becomes a part of your decision-making,

3:27you begin to appreciate the listed

3:29markets

3:30>> [music]

3:30>> and you begin to appreciate that listed

3:32markets rarely misprice volatility and

3:34therefore speculative investments become

3:37well-defined. For example, over my

3:40lifetime, I have invested in a number of

3:42non-traditional alternative investments.

3:44Most of these [music] investments simply

3:47didn't work out or they don't work out.

3:48I never really understood why my track

3:50record was as bad as it was. Then I

3:52realized I never invested correctly

3:55because I was seduced by the upside and

3:57never understood the real downside risk.

3:59In other words, I treated these

4:01investments like they were 50/50 shots,

4:03but they should have been priced 90/10

4:05against me. So, my allocations and deal

4:08structure were horribly wrong because I

4:10never assigned the correct volatility to

4:12these trades. Live and learn. I do much

4:14better now. Reason number three,

4:17volatility is predictive. Volatility is

4:19a tradeable fear gauge, so it's very

4:22real for today, tomorrow, and 6 months

4:24from now.

4:25When we discuss volatility, we talk

4:27about implied volatility because implied

4:29volatility measures how volatile the

4:32markets will be in the future.

4:33Historical volatility measures what has

4:35happened in the past. Most importantly,

4:38having a tradeable fear index lets us

4:40know in real time the market's

4:42temperament and appetite for risk, so we

4:44know if the market is complacent or

4:46capitulating, and we know if the

4:49derivatives market is pricing premium,

4:51rich, or cheap. It is so important to

4:53eliminate [music] the guessing game and

4:55to take the subjectivity out of the

4:57decision-making process. Again, for

4:59example, I was a CBOE exchange market

5:02maker for almost 20 years. I predated

5:04the VIX, and when trading in the pits, I

5:07would have to guess if volatility was

5:09expensive or cheap. We simply did not

5:11know, and I'm sure we gave away a ton of

5:13money because we were trading in the

5:15dark. Fast-forward to today's front-end

5:18technology and retail traders have IVR,

5:20implied volatility rank,

5:22to give them context about the levels of

5:24implied volatility. It's front and

5:26center on almost every trading platform,

5:28and they also have implied expected

5:31move, which is derived from an

5:33individual's equity implied volatility

5:35on every single trade page. So, the game

5:38has changed completely, and volatility

5:40is [music]

5:41truly front and center. Reason number

5:43four,

5:44volatility creates efficiency.

5:47Volatility helps to improve basis. It

5:49creates speculative opportunity and

5:51allows for strategic capital efficiency.

5:55That's a mouthful, but let's dig into

5:56it. One of the most important uses of

5:58heightened volatility is for writing

6:00calls or writing puts against an

6:02underlying to improve [music]

6:04the cost basis.

6:05The higher the implied volatility, the

6:07higher the option prices and the higher

6:09the probability of profit. I believe

6:11that any opportunity you have to limit

6:13profitability in return for a higher

6:16probability of profit

6:18is one of the most sensible things you

6:19can do when investing. Trying to improve

6:21basis is a must-have strategy for

6:24passive and active investors alike.

6:26Volatility can also help to create high

6:28alpha opportunities because it opens the

6:30door to outlier cases. It opens the door

6:32to binary events and earnings trades. We

6:35are indifferent to strategies selected,

6:37but almost every option strategy is more

6:39effective in periods of high implied

6:41volatility. Remember, volatility is a

6:44math equation. It is mean reverting. And

6:46as such, it contracts twice as often as

6:49as it expands. Lastly, volatility can be

6:52addressed through strategic capital

6:54efficiency. In other words, because it

6:56is tradable, you can use defined or

6:58undefined risk. So, there's a ton of

7:00optionality. This means if something

7:02looks attractive because of heightened

7:04volatility, it can be traded using a

7:06minimal amount of risk capital. As an

7:08active trader, volatility plays the

7:10biggest role in my daily trading. I have

7:12to check the volatility box or I won't

7:14make the trade. If volatility or if

7:16watching volatility is new to you, start

7:19with IV rank. It just makes things a lot

7:21easier [music]

7:22and it's front and center on virtually

7:23every platform. Individual volatilities

7:25are a little bit confusing cuz you're

7:27not sure how to give them context, but

7:29start with IV rank and if the IV rank is

7:31high, you're usually pretty safe to move

7:33forward. Thanks for watching this video.

7:35I look forward to your reactions in the

7:37comment section. I read every comment

7:40and respond to as many as I can.