Common Options Trading Mistakes

Most losses in options trading come from a small number of recurring mistakes. These are not random bad luck. They are predictable patterns that show up repeatedly among newer traders, and in most cases they are entirely avoidable once you know what to look for.

This article covers the most common mistakes and the specific changes that eliminate each one.

Mistake 1: Buying short-dated, far out-of-the-money options

This is the most common way beginners lose money in options. A $0.30 call expiring in 5 days feels like a cheap lottery ticket. Occasionally it pays off. Consistently, it does not.

Why it fails: far OTM options have delta near 0.05 to 0.10, meaning the stock needs to make a very large move very quickly just to approach the strike. Meanwhile, theta is destroying the option's remaining value daily at an accelerating rate. The combination of needing a large move with almost no time to get there produces very low probability outcomes.

The fix: if you are buying options, target strikes with delta between 0.30 and 0.50 and at least 30 days to expiration. Pay more for the option. The higher probability of profiting is worth the higher premium.

Mistake 2: Buying options in high implied volatility environments

Many beginners buy calls or puts right before earnings because they expect a big move. The problem: options are priced for that big move already. When the announcement comes and even if the stock moves significantly, IV crush deflates the option's value so rapidly that buyers often lose money despite being right on direction.

Why it fails: you buy at peak IV and hold through the event. The stock moves 5% in your favor but IV drops 40 points. The vega loss exceeds the delta gain. Your option is worth less after a favorable move than it was before.

The fix: before buying options around any event, check IV rank. If IV rank is above 60, options are expensive. Consider selling structures instead or waiting for IV to normalize before buying.

Mistake 3: Not having an exit plan before entering

This mistake costs more money than any other. You enter a trade, it starts going against you, and instead of closing at your predefined stop loss, you hold and hope. The option continues losing value. You hold until it expires worthless.

Why it fails: without an exit plan, every decision is emotional. The sunk cost of what you already paid makes you reluctant to realize the loss. Holding a losing long option typically ends in a 100% loss, whereas closing at a predefined stop (say, when 50% of premium is lost) limits the damage.

The fix: before entering any trade, write down your exit plan. At what profit do you close? At what loss do you close? Set these levels before you enter, not after things start moving.

Mistake 4: Ignoring bid-ask spreads

Options often have wide bid-ask spreads, especially on less liquid underlyings or far OTM strikes. A spread of $0.50 on a $1.00 option means you immediately lose 25% of the option's value on entry, and another 25% on exit. That is a 50% round-trip cost before the stock has moved at all.

Why it fails: beginners often use market orders, getting filled at the ask on entry and the bid on exit. On liquid underlyings with tight spreads this matters less. On illiquid options it is portfolio-destroying.

The fix: always use limit orders at the midpoint of the bid-ask spread. Check the open interest before entering any position. Avoid any option with a spread wider than 10% of its price. Stick to liquid underlyings with active options chains.

Mistake 5: Overleveraging small accounts

Options provide significant leverage. A small account can control large notional stock exposure through options. Many beginners treat this as an opportunity to concentrate their entire account into one or two trades.

Why it fails: when one of those trades goes to zero (which happens regularly with bought options), the account is devastated. The leverage that creates the upside potential also accelerates the downside.

The fix: never risk more than 2 to 5% of your total account on any single trade. If your account is $5,000 and you follow a 3% risk rule, your maximum loss per trade is $150. Trade 1 contract on appropriately priced options.

Mistake 6: Selling options without understanding the obligation

Newer traders sometimes sell options because they heard it is a way to generate income, without fully understanding the obligation they are taking on. Selling a naked put on a $100 stock and getting assigned means you are buying 100 shares at $100, committing $10,000 of capital, regardless of what the stock is doing.

Why it fails: the premium collected (say $200) looks like free money until the stock drops 20% and you are holding a $2,000 loss on a position you did not intend to take.

The fix: only sell puts on stocks you would genuinely be happy to own at the strike price. Only sell covered calls on shares you already own and are willing to part with at the strike price. Use defined-risk spread structures (iron condors, credit spreads) before progressing to undefined-risk strategies.

Mistake 7: Holding options into expiration when they are near the strike

Short options that are near the strike at expiration expose you to pin risk: the uncertainty of whether the stock will close just above or just below your strike. A $0.01 difference determines whether you are assigned or not, and after-hours moves can trigger assignment even when the option looked safe at the 4:00pm close.

Why it fails: traders hold to expiration trying to collect the last few cents of premium. The assignment that results from a last-minute stock move can cost significantly more to unwind than simply closing the position cost the day before.

The fix: close short options before expiration when the stock is within 1 to 2% of your strike. The small closing cost is always worth eliminating assignment uncertainty.

Mistake 8: Trading too many different underlyings at once

Beginners often try to trade options on 10 or 15 different stocks simultaneously, spreading their attention and capital too thinly. Managing multiple positions across many underlyings requires significant time and attention, and most of these positions do not get the monitoring they need.

Why it fails: an earnings announcement affects one of your holdings and you do not notice until significant damage has occurred. A position approaches your short strike and you miss the signal to adjust. Too many positions creates too many ways for things to go wrong without your awareness.

The fix: start with 2 to 3 positions maximum while learning. Understand each position's Greeks, its breakeven, and its management plan before adding another. Quality of attention matters more than quantity of positions.

Related terms: IV rank, IV crush, bid-ask spread, defined risk, theta, delta, assignment, position sizing

Try it on Stryke: Use the Options Screener to check IV rank and liquidity before every trade, and the Portfolio tracker to monitor all open positions and their proximity to breakeven levels.