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Wednesday, November 19, 2014

Tastytrade: A Shill with Skills

Tastytrade is a online financial network that started broadcasting in 2012 and which claims to have somewhere in the neighborhood of 50,000 to 60,000 daily viewers watching its shows on the internet. They also state that they are on a mission to reach 100,000 viewers by the end of 2015. Tastytrade promotes itself as "a real financial network" that will teach people how to make options trades in their brokerage accounts and make money.

The Shill Financial Network

In fact, tastytrade (they do not use capital letters) is not "a real" financial network as they claim, but instead it is a very clever version of the gambler's shill or tout. A gambling joint uses shills to make winning at the gaming tables appear more likely than it actually is. Street peddlers running illegal three-card monte and shell-games are notorious employers of shills. The age old strategy of promoting the excitement, the action, and most of all the winning at the gaming tables has migrated to online brokers like TD Ameritrade. Tastytrade does not hide the fact that it has a so called marketing arrangement with TD Ameritrade. But, they do not provide any details about what their financial incentives are with TD Ameritrade. However, the evidence is that tastytrade's side of the deal simply requires them to generate more assets under management and commission revenue for Ameritrade. In other words, tastytrade's real mission is to get their shill act on and entice customers to make more trades and put more money towards trading. Given the internet's ability to track everything, the tastytrade numbers must be looking very good at TD Ameritrade, because tastytrade now employs over 50 people at its new multi-million dollar Chicago headquarters. Tastytrade has also released new gaming trading software called dough, that is designed to increase the trading action and generate even more commission revenue.

Options day trading is rebranded as investing by tastytrade
Options day trading is rebranded as "investing" by tastytrade
Tastytrade is working day and night to get mom and pop investors to ditch their tightfisted buy and hold the index fund mentality. You can forget Warren Buffett and the Bogleheads of Jack Bogle. Today on the tastytrade network it is all about the derivative plays, volatility, and the options action. Do you hear the sound of those chips dropping on every earnings play that comes along? "Trade small, trade often" is the often repeated slogan of tastytrade. That means that investors should now become options day traders. They need to follow a strategy of managing their winners and just letting the losing trades go. They also need to be careful and not lose too much on any one trade. It is advertised as a formula that is fun, straightforward to learn, accessible by anyone, and most importantly of all, it is profitable. But, please don't worry about the commissions, that is just the small cost of doing business. The tastytrade on-air personalities dismissively refer to commissions as merely "resort fees," which makes them sound like a sunny place. When in fact, it is where shady people will shank you.

The ring leader of this shill network is Tom Sosnoff. He runs the show at tastytrade and he commands most of the air time on the network. He was formerly a Chicago floor trader and was one of the founders of the thinkorswim brokerage, which was acquired by TD Ameritrade in 2009. As a poster boy for the sedentary pursuit of trading profits the pasty Sosnoff is a sickly, stuttering, egomaniacal master of the trading con. The con is that every mom and pop investor can be turned into a trading wiz by using the strategies, software and techniques that tastytrade espouses. Everyone and anyone can make trading profits by selling options premium in high volatility underlyings. Also, a little futures scalping on the side between options trades makes for a higher level of excitement and engagement and that in-turn leads to better trading. So says Tom Sosnoff the master shill.

Supertrader, Super shill

Karen the Supertrader
Karen the Supertrader
Tastytrade showcases the apparent amazing success of "Karen the Supertrader." As the tastetrade website writes:
"Karen is a retail, do-it-yourself investor that has turned a few thousand dollars into millions in a number of years managing her own money. She trades using tastytrade strategies and now manages a large fund."
Karen the Supertrader's real name is Karen Burton and her hedge fund is Hope Investments, LLC, of Brentwood, Tennessee. Her very limited SEC filing info is here. Her success story serves as a well baited hook to lure others into the options trading pool. However, be careful as Sosnoff warns when talking about Karen's trading strategies. She takes on more risk of loss with naked short options positions than even the great Sosnoff could stomach. But, the tastytrade sell/shill is that through practice and following their techniques, you too can become a successful options trader like Karen.

Tastytrade also sells 24x7 access to all of the trades that Sosnoff makes himself, through a mobile app called Bob the Trader. While Sosnoff often declares that he is for full transparency in all things financial, he does not disclose the dollar size or profitability of any of his thousands of trades. So just take his word for it and assume that Sosnoff makes lots of money from trading.

Piss Poor Results

Tastytrade has very few documented examples of how well its options trading strategies really fare when implemented. In the few cases we do have, the results have been piss poor.

One example of the tastytrade method in action is on their show: Where Do I Start - Back to Cool. The show is hosted by Sosnoff's sidekick and alter ego Tony "the Bat" Battista and features novice tastytrader Katie McGarrigle, who is on the the tastytrade support staff. It airs daily for twenty minutes, from 11:40 - 12:00 EST. The bottomline is that this year has not gone well for Tony and Katie. Tony recommended taking options positions in oil futures (/CL), and the QQQ and SPY ETF's that blew up Katie's account. Three bad trades essentially wiped out the net profits from hundreds of smaller trades. In the parlance of tastytrade: the Bat took Katie down, and how. Her account as of November 14th, 2014 was down 15.75% for the year. This is hardly a ringing endorsement of the tastytrade method as the path to financial security. Something ain't right when a veteran of 25+ years of trading underperforms the market by over 26%, when using the tried and true tastytrade methods. Ameritrade, of course, took thousands of dollars in commissions out of Ms. McGarrigle's pocket, but the exact amount is not disclosed. See the account summary here below:

There is an old trading expression: "Eat like a bird, shit like an elephant." Unfortunately that is exactly what the tastytrade method did to Katie's account. Three big crappy trades, more than wiped out all the hard earned small bird gains. Not good.

Another example of the tastytrade method falling flat was viewed in segment called Anatomy of an Account that aired on November 12, 2014. The problem being diagnosed on that show was why after 11 months and and 131 trades, 110 of which were winners, for a very high 83.9% winning percentage, was a women's IRA account not showing any profits? See the screenshot below.

Sosnoff's takeaway from this women's case was that she just needed to "tweek things" and basically take on more risk. There was no mention of the in and out commissions eating all the gains, because again that is just the cost of doing business the tastytrade way.

A tastytrader's IRA Account has lots of winning trades but no profits

Despite the cheer leading and hype, the learning curve for the tastytrade method is really steep and expensive: hundreds of trades, lots of time starring at your screen. But, it is oh so very profitable for tastytrade's broker partner, Ameritrade. Turning tens of thousands of long term investors into options day traders is the holy grail for a brokerage firm. Ameritrade's stock performance reflects how well this strategy is playing out. Ameritrade stock was up over 13.5% for 2014 (through Nov. 17, 2014), and up 107% since January 1, 2013. This is phenomenal growth fueled in part by the big influx of new day traders that tastytrade has brought into the commission casino.

You can see visible evidence of the hundreds and thousands of commissions that tastytrade is funneling into TD Ameritrade's commission casino everyday. One tastytrade network show is called Good Trade - Bad Trade, which airs daily from 10:45 - 11:00am EST. During this segment Tom Sosnoff looks over various options trades and then implements the one best "good trade" in realtime. If you look at the options volume before, during and after Sosnoff makes his trade, you will often see hundreds of tastytrade viewers piling into Sosnoff's trade. It is a wonder to behold. This large wave of trading requires Sosnoff to use large and highly liquid stocks so that all of his tastytrade nation can easily follow him into the trade and feed the commission beast. There is no track record of how successful this daily "Good Trade - Bad Trade" has been over the last three years, but Sosnoff would of course tell you that it has been very profitable.

Crappy Market Prognosticator

Another big problem with Sosnoff is that he is a crappy market prognosticator.  However, despite being directionally wrong, and putting his viewers on the wrong side of the market, Sosnoff miraculously escapes his bad directional assumptions and still claims to make money. This year Sosnoff has been bearish as the market has climbed a wall of worry. Many of his viewers, who have followed Sosnoff's bearish proclivities have gotten crushed this year. Mr. Battista and Ms. McGarrigle are a prime example of how following a bearish assumption in a whippy bull market will bust your account. But, Mr. Sosnoff skates through all the carnage that his lousy market forecasts inflict with hardly a hint of scratch, or a draw down to his own account. Amazing.

For example, in his May 12th, 2014 daily morning email alert, called the "Cherry Bomb," Sosnoff wrote: "So, get ready – and yes, we’re still in the 1800 before 1900 insanity camp." Meaning that he thought the S&P 500 index would go down to 1800 before it went up to 1900. That day the index closed at 1896.65, up 18.17 from the previous day's close.

On May 16th, with the S& P index at 1870.85 he repeated the call, when he wrote: "Careful, stay small and we still think 1800 before 1900." The market (S& P 500) opened that day at 1871, a week latter on May 23rd it closed at 1900.53, and never looked back as it shot to 1989 by July 23rd. Sosnoff was bearish the entire 5% ride up.

As the pain of being a bear during this summer's bull run increased, Sosnoff used his Cherry Bomb of July 7th, 2014, to commiserate with his followers:
I took a step back this weekend just to review last week’s emails. The general theme was ‘I feel like I’m doing everything right but I can’t seem to make any money and I’m not sure why’ to ‘I bet small, I stayed small but I’m dying with very little theta, too many short deltas and I don’t know how to stop the bleeding.’ The first question is easy. You are doing everything right! Sometimes it’s very difficult to make money regardless of your level of ‘correctness.’ ...
Yes indeed, it is not easy to make money especially when following tastytrade and Tom Sosnoff. On Tuesday, November 18th, 2014, with the S& P 500 index closing at 2056.08, Sosnoff was more bearish than ever during his show. Unfortunately anyone heeding his market advice this year has been crushed.

Tastytrade - only 16% of its traders are market performers or better?

The following is a very optimistic educated guess on how the viewers of tastytrade are really doing. It would not be surprising if the actual trading results for tastytraders was much worse than this assumption. The assumption is based on the normal distribution, which is the basis for what drives much of tastytrade's probability based trading.

Small percentage of tastytrade members beat market

The bottomline for tastytrade and TD Ameritrade is that traders are more profitable than investors. There is no difference between winning traders and losing ones, they all contribute to the massive commission revenue that tastytrade's shilling is driving to TD Ameritrade.

Shill with Skills

All of tastytrades promotions and shows are designed to sell investors on the idea that they can become elite traders. It is a powerful message, financial empowerment by building know-how, that has attracted a large and loyal audience. However, when you dig below the surface you will find tastytrade is really just about generating millions of dollars in commissions for TD Ameritrade. Rebranding options day trading as "investing" is grossly wrong. Day trading is not investing, it never was, and it never will be. Tastytrade is just a new age financial shill with some new skills.

Calculated Risk

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