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Options TradingLesson 10

Common Options Mistakes

Learn from others' expensive lessons. These mistakes cost beginners the most money.

7 min read
Intermediate

Educational purposes only. This content does not constitute investment advice. Read our disclaimer

StockCram is not a broker-dealer, investment adviser, or financial institution. All content is for educational and informational purposes only and should not be construed as personalized investment advice. Consult a qualified financial professional before making investment decisions. Past performance does not guarantee future results.

TL;DR

Most options losses come from: buying too cheap, not enough time, too large positions, and ignoring IV. Avoid these and you're ahead of most beginners.

All I want to know is where I'm going to die so I'll never go there.

Charlie Munger— Vice Chairman, Berkshire Hathaway

Mistake #1: Buying Cheap OTM Options

The Trap

"This call is only $0.10! If the stock moves just a few percent, I could 10x my money!"

Reality: Cheap options are cheap because they're almost certainly expiring worthless. The market is efficient - there's no free money.

✓ The Fix

Buy ATM or slightly OTM options with realistic strike prices. Pay more for higher probability of profit. Think probability, not potential max gain.

Mistake #2: Not Enough Time

The Trap

"I think this stock will go up this week, so I'll buy the weekly option - it's cheaper!"

Reality: Weekly options have extreme theta decay. Even if you're right eventually, being wrong for a few days destroys the position.

Expected MoveMinimum ExpirationRecommended
This week2 weeks4 weeks
This month6 weeks2-3 months
This quarter4 months6 months

Mistake #3: Position Too Large

The Trap

"I'm really confident about this trade. Let me put 20% of my account on it!"

Reality: Even great traders are wrong 40%+ of the time. One bad trade shouldn't blow up your account.

Position Sizing Guidelines

Conservative (recommended)1-2% per trade
Moderate3-5% per trade
Aggressive (not recommended)5-10% per trade

Mistake #4: Ignoring IV (Implied Volatility)

The Trap

"Earnings are tomorrow and I think they'll beat! I'll buy calls now!"

Reality: IV is sky-high before earnings. After the announcement, IV collapses. Your calls might lose 50% even if the stock goes UP because the volatility premium disappeared.

IV Crush Example

Before Earnings

Stock: $100

Call price: $8.00

IV: 80%

After Earnings (stock up 3%!)

Stock: $103

Call price: $5.50

Loss: -31% despite being right

Mistake #5: No Exit Plan

The Trap

"I'm up big! But maybe it'll go higher..." or "I'm down significantly but it might come back..."

Reality: Greed turns winners into losers. Hope holds losers until they expire worthless. Have rules BEFORE you enter.

✓ Consider Setting Exit Criteria Before Entry

  • • Profit target: A predetermined gain level to consider exiting
  • • Loss limit: A predetermined loss level to limit downside
  • • Time-based exit: A date to reassess before accelerated decay
  • • Thesis change: Exit criteria if original reasoning no longer applies

Appropriate levels vary by strategy and individual risk tolerance. This is educational, not advice.

Quick Reference: Mistakes to Avoid

MistakeWhy It HurtsFix
Cheap OTM optionsExpire worthless 90%+Buy ATM or slightly OTM
Short time to expiryTheta eats position aliveBuy 2x more time
Oversized positionsOne loss wipes out accountRisk 1-3% max per trade
Ignoring IVBuy high, get crushedCheck IV percentile
No exit planEmotions drive decisionsSet rules before entry

Key Takeaways

  • •Cheap options are usually bad value. - Pay more for higher probability of profit.
  • •Time is your enemy when buying. - Give yourself more time than you think you need.
  • •Size matters. - Keep positions small enough that losses don't hurt long-term.
  • •Plan your exits before entry. - Emotions are terrible trading advisors.

Terms You Learned

IV CrushTime DecayPosition SizingRisk ManagementExit Strategy

Continue Learning

Guide

What Is Theta Decay?

Understand how time decay erodes option value — a common beginner trap.

Read What Is Theta Decay?
Guide

What Is Options Premium?

Know what you're paying for — intrinsic vs extrinsic value breakdown.

Read What Is Options Premium?
Calculator

Options Calculator

Model option prices before trading to avoid costly mistakes.

Read Options Calculator
Definition

Premium

The price you pay to buy an option contract.

Read Premium
Definition

Time Decay

How options lose value as expiration approaches.

Read Time Decay

Frequently Asked Questions

Buying cheap, far out-of-the-money options near expiration. They look like lottery tickets but almost always expire worthless. The low price is tempting but the probability of profit is extremely low.

Buy options with more time than you think you need (2x your expected timeframe). Avoid holding options into the final 2 weeks unless you have a specific reason. Consider selling options instead of buying to collect theta.

Usually not as a beginner. IV crush after earnings often destroys option value even if you're right about direction. The stock might go up 3% but your call drops 40% because volatility collapsed.

Most experts suggest risking 1-5% of your portfolio per trade maximum. Some are even more conservative at 1-2%. Never bet your entire account on a single options trade, no matter how confident you are.

Generally no. Unlike stocks, options have time decay working against you. Averaging down often means throwing good money after bad. If your thesis was wrong, accept the loss and move on.

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