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Avoid These 7 Costly Mistakes New Options Traders Make

05/03/2025

Options trading offers explosive profit potential—but also quick, painful losses for those who underestimate its risks. While seasoned traders use options to hedge, generate income, and speculate efficiently, beginners often fall into predictable traps that drain their accounts.

In this guide, we’ll expose the seven most expensive mistakes new options traders make and, more importantly, how to avoid them. Whether you’re trading calls, puts, spreads, or complex strategies, steering clear of these errors will save you money, frustration, and costly learning curves.

Mistake #1: Trading Without a Defined Strategy

The Problem

Many beginners buy calls or puts based on a hunch, tip, or gut feeling, without clear entry/exit rules. This leads to:

  • Random wins (luck) followed by consistent losses.
  • No way to measure performance or improve.

The Fix

  • Choose one strategy (e.g., covered calls, credit spreads) and master it.
  • Define rules for:
    • Entry (What’s your trigger? Technical breakout? Oversold RSI?)
    • Exit (Profit target? Stop-loss?)
    • Position sizing (How much capital per trade?)

Pro Tip

Paper-trade first to refine your approach before risking real money.

Mistake #2: Ignoring Implied Volatility (IV)

The Problem

New traders buy options when IV is sky-high (e.g., before earnings), paying inflated premiums. When IV drops post-event, the option loses value—even if the stock moves favorably.

The Fix

  • Check IV Percentile/Rank before buying:
    • High IV = Sell premium (e.g., credit spreads).
    • Low IV = Buy premium (e.g., long calls/puts).
  • Avoid buying options right before earnings, Fed meetings, or other high-volatility events.

Pro Tip

Use platforms like ThinkorSwim or Barchart to compare current IV to historical levels.

Mistake #3: Overleveraging with Cheap OTM Options

The Problem

Out-of-the-money (OTM) options are cheap, tempting traders to load up on them. But they:

  • Expire worthless 80%+ of the time.
  • Require a massive move just to break even.

The Fix

  • Prioritize probability over lottery tickets.
  • Use spreads (e.g., debit spreads) to reduce cost while capping risk.
  • Focus on near-the-money (NTM) or slightly ITM options for better odds.

Pro Tip

Calculate your break-even price before entering. If the stock needs to rally 20% in a week, it’s likely a bad bet.

Mistake #4: Not Using Stop-Losses (or Moving Them)

The Problem

Beginners often:

  • Hold losing trades hoping for a turnaround.
  • Widen stop-losses to avoid taking a loss (which turns small losses into disasters).

The Fix

  • Set hard stop-losses (mental stops don’t work—use automated ones).
  • Risk only 1-2% of your account per trade.
  • Never move a stop farther away—respect your plan.

Pro Tip

For options, set stops based on premium loss (e.g., “Exit if the option loses 50% of its value”).

Mistake #5: Chasing Trades (FOMO)

The Problem

Seeing a stock rally 10%, new traders buy calls at the top, only to get crushed when the pullback hits.

The Fix

  • Wait for pullbacks in uptrends (e.g., buy calls when RSI resets to 40-50).
  • Avoid chasing extended moves—let the trade come to you.

Pro Tip

If you’re feeling FOMO, it’s usually too late. Walk away.

Mistake #6: Misunderstanding Assignment Risk

The Problem

New traders sell options without realizing:

  • Short calls can force you to sell stock at a bad price.
  • Short puts can force you to buy stock you can’t afford.

The Fix

  • Know when assignment is likely (e.g., deep ITM near expiration).
  • Close short options before expiration if you don’t want the stock.
  • Trade spreads to limit assignment risk.

Pro Tip

Monitor your delta exposure—high absolute delta increases assignment chances.

Mistake #7: Trading Too Big, Too Soon

The Problem

After a few wins, beginners get overconfident and:

  • Double down on risky trades.
  • Blow up their accounts in weeks.

The Fix

  • Start small (even if you have capital).
  • Treat trading as a marathon, not a sprint.
  • Scale up only after consistent profitability.

Pro Tip

If a single trade can wipe out 10%+ of your account, you’re gambling—not trading.

Bonus: The Psychological Traps to Avoid

1. Revenge Trading

  • Mistake: Trying to “get back” losses immediately.
  • Fix: Take a break after a losing trade.

2. Overconfidence After Wins

  • Mistake: Assuming a hot streak means you’ve “figured it out.”
  • Fix: Stick to your strategy—no exceptions.

3. Analysis Paralysis

  • Mistake: Over-researching and missing good setups.
  • Fix: Trust your edge and execute.

Final Thoughts: Trading is a Skill, Not a Lottery

The difference between successful and struggling options traders isn’t intelligence—it’s discipline, risk management, and avoiding these seven mistakes.

Key Takeaways:

✅ Trade with a plan—no random bets.

✅ Respect volatility (IV kills careless buyers).

✅ Avoid OTM lottery tickets—focus on high-probability trades.

✅ Use stops religiously.

✅ Never chase—wait for setups.

✅ Understand assignment risks before selling options.

✅ Start small—protect your capital.

Master these principles, and you’ll sidestep the pitfalls that wipe out most beginners.

Now go trade smarter.