Top 7 Rookie Option Mistakes That Kill Beginners — And How You Can Dodge Them

When starting out with options trading, beginners often make predictable mistakes that can quickly deplete their trading accounts. These errors aren't usually due to lack of intelligence but rather to common psychological biases, knowledge gaps, and poor risk management practices. Understanding these pitfalls before you encounter them can save you significant money and emotional distress. By learning from others' mistakes, you can dramatically shorten your learning curve and increase your chances of becoming a successful options trader.

Importance for Trading

Understanding common options trading mistakes is crucial because:

• Options trading has a steeper learning curve than stock trading
• Mistakes can lead to accelerated losses due to leverage
• Many errors are psychological in nature and hard to recognize in yourself
• These mistakes are remarkably consistent across different traders
• Avoiding just a few key errors can dramatically improve results
• Learning from others' mistakes is much cheaper than learning from your own

"In options trading, avoiding the big mistakes is often more important than finding the perfect strategy. Defense comes before offense."

The New Driver Story

Meet Alex, who recently got his driver's license and bought his first car. His experience learning to drive and maintain his vehicle perfectly illustrates the common mistakes new options traders make.

Mistake #1: Ignoring Position Sizing

Alex was so excited about his new car that he immediately invited five friends for a road trip. His small compact car was designed to comfortably seat four people, but Alex thought he could squeeze everyone in.

"It'll be fine," Alex told his concerned parents. "The car can handle it. Plus, we'll bring all our camping gear for the weekend."

As they set off, the car was dangerously overloaded. The excess weight affected the car's handling, braking distance, and fuel efficiency. When they encountered a steep hill, the engine struggled and overheated, leaving them stranded on the roadside.

"I learned an important lesson," Alex admitted later. "Just because the car can technically fit everyone doesn't mean it should. There are limits to what it can safely handle."

"Position sizing is like respecting your vehicle's weight limits. Just because you can buy 20 contracts doesn't mean you should. Overloading your account with oversized positions is a fast track to a breakdown."

This illustrates the mistake of ignoring position sizing in options trading. Just as Alex overloaded his car beyond its safe capacity, new traders often take positions that are too large relative to their account size. When the market moves against them, these oversized positions can quickly lead to substantial losses or even account blowouts. Proper position sizing—typically risking no more than 1-5% of your account on a single trade—is essential for longevity in trading.

Mistake #2: Chasing Cheap Options

After getting his car back on the road, Alex needed to buy new tires. At the tire shop, he was presented with several options ranging from $75 to $200 per tire.

"I'll take the cheapest ones," Alex decided immediately. "They're all round and black—how different can they be? Plus, I can buy four of these for the price of two premium tires."

The salesperson warned him about the cheap tires' poor quality and short lifespan, but Alex was focused solely on the low price.

Three months later, Alex was back at the tire shop. His cheap tires had worn out quickly, provided poor traction in the rain, and one had already developed a bulge that could have led to a dangerous blowout.

"I thought I was being smart by saving money," Alex reflected. "But I ended up spending more in the long run, and I put myself at risk. The cheapest option turned out to be the most expensive."

"Chasing cheap options is like buying the lowest-priced tires. They seem like a bargain, but there's usually a good reason they're cheap—they have a low probability of performing well and often lead to losses."

This demonstrates the mistake of chasing cheap options. Many new traders are attracted to low-priced options (often far out-of-the-money) because they can buy more contracts for the same amount of money. However, these cheap options are inexpensive for a reason—they have a low probability of success. Like Alex's cheap tires, they typically expire worthless, leading to consistent losses over time.

Mistake #3: Ignoring Implied Volatility

Alex decided to take a weekend trip to a popular beach town. He didn't check any travel advisories or consider that it was a holiday weekend.

"The drive usually takes two hours," he told his girlfriend. "We'll be there by noon easily."

They set off at 10 AM, expecting a smooth journey. Instead, they encountered massive traffic jams, with travel time tripled due to the holiday rush. What's worse, when they finally arrived, hotel prices were double the normal rates, and restaurants had two-hour waits.

"I should have checked if there was anything special happening this weekend," Alex realized. "The same trip costs me much more time and money because I didn't account for the unusual conditions."

"Trading options without checking implied volatility is like traveling without checking if it's a holiday weekend. You might pay far too much or encounter unexpected conditions that transform a normal journey into a costly ordeal."

This illustrates the mistake of ignoring implied volatility when trading options. Just as Alex failed to consider the special conditions of the holiday weekend, many new options traders don't check whether implied volatility is unusually high or low before placing trades. Buying options when implied volatility is high (like booking a hotel on a holiday weekend) means paying a premium that will likely decrease even if the stock moves in your direction. Understanding and accounting for implied volatility levels is essential for successful options trading.

Mistake #4: Holding Options Too Close to Expiration

Alex had planned to get an oil change for his car but kept putting it off.

"I know the recommendation is to change it every 5,000 miles, but I'm only at 4,800," he reasoned. "I'll do it next week when I'm less busy."

Next week turned into next month. At 7,500 miles, his car started making strange noises. When he finally took it to the mechanic, he discovered that the lack of oil changes had caused accelerated engine wear that would be expensive to repair.

"If I had just done the maintenance on schedule, I would have avoided this problem," Alex realized. "The last 2,500 miles did exponentially more damage than the first 5,000 because the oil had degraded so much."

"Holding options into the final weeks before expiration is like driving thousands of miles past your oil change date. The decay accelerates dramatically, doing more damage in the final weeks than in all the previous months combined."

This demonstrates the mistake of holding options too close to expiration. Options experience time decay (theta), which accelerates in the final weeks before expiration. Many new traders don't appreciate how quickly options can lose value in their final weeks, even if the underlying stock price doesn't move against them. Like Alex ignoring his oil change schedule, holding options too long can lead to rapidly accelerating losses due to time decay.

Mistake #5: Failing to Define an Exit Strategy

Alex and his friends decided to take a road trip without a clear destination or route.

"Let's just drive and see where we end up," Alex suggested. "It'll be an adventure!"

They set off with no maps, no GPS, and no planned stops. By evening, they were lost in an unfamiliar area with low fuel, no accommodations, and closed restaurants.

"This seemed like a fun idea this morning," Alex admitted as they desperately searched for a hotel. "But now I realize that setting off without any plan for where we're going or when we'll stop was irresponsible."

"Trading without an exit strategy is like starting a road trip with no destination or planned stops. The journey might be exciting at first, but it usually ends with you lost, exhausted, and in a worse position than when you started."

This illustrates the mistake of failing to define an exit strategy before entering a trade. Many new options traders enter positions with a clear idea of why they're getting in but no plan for when or how they'll get out. Without predetermined profit targets and stop-loss levels, they make emotional decisions based on market fluctuations, often holding losing trades too long or exiting winning trades too early. Defining exit criteria before entering a trade is essential for consistent results.

Mistake #6: Overtrading

After a few months of driving, Alex became overconfident in his abilities. He started taking unnecessary trips, often driving across town multiple times a day for minor errands.

"I'm a good driver now," he told himself. "I should use my skills and my car as much as possible."

Soon, Alex noticed his car expenses had skyrocketed. He was spending a fortune on gas, putting excessive miles on his vehicle, and increasing his risk of accidents simply because he was on the road so frequently.

His father pointed this out: "Just because you can drive doesn't mean you should drive everywhere all the time. Each trip has a cost and a risk, and many of these journeys aren't necessary."

"Overtrading is like driving across town ten times a day for minor errands. Each trade has costs and risks, and making too many trades rarely improves returns—it just increases expenses and the probability of mistakes."

This demonstrates the mistake of overtrading. Many new options traders feel compelled to always have positions in the market, taking trades out of boredom or FOMO (fear of missing out) rather than because they've identified genuine opportunities. Like Alex's unnecessary driving, overtrading increases costs through commissions and spreads while also increasing the likelihood of making mistakes due to mental fatigue. Quality of trades is far more important than quantity.

Mistake #7: Not Learning the Basics First

Alex had been driving for several months when his car made an unusual noise. A dashboard warning light came on, but he had never bothered to learn what the different warning lights meant.

"It's probably nothing serious," he thought, ignoring the light and continuing to drive.

A week later, his engine seized completely while on the highway, causing a dangerous situation and resulting in an expensive tow and repair bill.

The mechanic was direct: "This was entirely preventable. That warning light was telling you that your engine oil pressure was low. If you had understood what it meant and addressed it immediately, you would have avoided this major breakdown."

Alex realized he had skipped a crucial step: "I was so eager to start driving that I never took the time to read the owner's manual or learn what the warning signs meant. That shortcut ended up costing me thousands."

"Jumping into options trading without learning the fundamentals is like driving without knowing what the dashboard warning lights mean. When things go wrong—and they will—you won't understand what's happening or how to respond."

This illustrates the mistake of not learning the basics first. Many new traders are attracted to options because of their profit potential but don't take the time to understand fundamental concepts like the Greeks, implied volatility, or option pricing models. Like Alex ignoring his car's warning lights because he didn't understand them, these traders miss important market signals and make preventable mistakes because they lack foundational knowledge.

Using These Lessons in Real-Time Options Trading

How to Implement Proper Position Sizing

Real-time example: You have a $20,000 account and are considering buying call options on Apple. Each contract costs $300.

How to avoid the mistake:

1. Define your risk per trade: Perhaps 2% of your account ($400)
2. Calculate maximum position size: If you're willing to risk the entire premium, that's 1 contract ($300 ÷ $400 = 0.75, rounded down to 1)
3. Consider your overall exposure: Ensure this position doesn't correlate too highly with other positions you already hold

"Position sizing isn't about how much you can make—it's about how much you can afford to lose while still staying in the game."

Action plan:

• Create a position sizing rule and stick to it religiously
• Calculate position size before looking at potential profits to avoid bias
• Consider reducing size further for higher-risk strategies
• Never increase size to "make back" previous losses

How to Evaluate Option Prices Properly

Real-time example: You're bullish on Tesla and looking at call options. You notice you can buy a $300 strike call (when Tesla is at $250) for just $1, while the at-the-money $250 strike costs $12.

How to avoid the mistake:

1. Calculate the probability of profit: The cheap $300 call has less than a 10% chance of being profitable
2. Consider why it's cheap: It's inexpensive because it's unlikely to work out
3. Look at the delta: The cheap option might have a delta of just 0.10, meaning it only captures 10% of Tesla's movement
4. Calculate the break-even point: Stock price + premium paid

"When an option is unusually cheap, it's like finding a 90% off sale on parachutes. There's probably a good reason for the discount, and it's usually not in your favor."

Action plan:

• Focus on options with deltas between 0.30 and 0.70 for a better balance of cost and probability
• Calculate break-even points to understand what the stock needs to do for you to profit
• Consider spreads to reduce cost rather than buying far out-of-the-money options
• Remember that buying ten cheap options instead of one quality option rarely improves your odds

How to Check and Use Implied Volatility

Real-time example: You're considering buying call options on Netflix ahead of earnings.

How to avoid the mistake:

1. Check current IV against historical levels: Is implied volatility unusually high right now?
2. Look for volatility crush scenarios: Earnings announcements typically lead to IV decreases after the event
3. Consider volatility-neutral strategies: If IV is high, consider spreads instead of buying single options
4. Understand the pricing impact: High IV means you're paying a premium that will likely decrease

"Buying options when implied volatility is at peak levels is like buying flood insurance during a hurricane. You're paying maximum price at exactly the wrong time."

Action plan:

• Use your broker's tools to check current IV percentile (where current IV ranks relative to the past year)
• Be cautious about buying options when IV is above the 80th percentile
• Consider selling options or using spreads when IV is extremely high
• Look for opportunities to buy options when IV is unusually low

How to Manage Time Decay Effectively

Real-time example: You own a call option with 60 days until expiration, and it's currently profitable.

How to avoid the mistake:

1. Understand the acceleration curve: Time decay increases dramatically in the final 30-45 days
2. Set time-based exit rules: Perhaps exit long options positions with less than 30 days remaining
3. Calculate daily theta: Know how much your option loses each day to time decay
4. Consider rolling to later expirations: Maintain your market exposure while avoiding rapid decay

"Time decay in options is like a melting ice cube. The melting starts slowly but accelerates dramatically as expiration approaches. Don't hold the ice cube until there's nothing left."

Action plan:

• Mark on your calendar when your option reaches the 30-45 day window
• Set alerts to review all positions with less than 30 days to expiration
• Be increasingly strict about cutting losses as expiration approaches
• For longer-term views, use options with at least 60-90 days until expiration

How to Define Clear Exit Strategies

Real-time example: You're about to buy a Microsoft call option for $5.00, expecting the stock to rise after an upcoming product announcement.

How to avoid the mistake:

1. Set a profit target: Perhaps exit when the option reaches $7.50 (50% gain)
2. Define your maximum loss: Maybe exit if the option falls to $3.50 (30% loss)
3. Identify technical exit points: Specific price levels on the stock chart that would invalidate your thesis
4. Consider time-based exits: Exit if the expected move doesn't happen by a certain date

"An exit strategy isn't about predicting the future—it's about defining in advance how you'll respond to different scenarios, removing emotion from the equation."

Action plan:

• Write down your exit criteria before entering any trade
• Set profit-taking and stop-loss orders immediately after entering the position
• Review your exit strategy if significant new information emerges
• Stick to your predetermined exits regardless of emotions or "hunches"

Practical Tips for Avoiding Common Options Mistakes

1. Start with paper trading to practice without financial risk
2. Trade small size when beginning with real money
3. Keep a detailed trading journal to identify your personal mistake patterns
4. Follow a checklist before entering any trade to ensure you've covered all bases
5. Review your trades regularly to identify and correct mistakes

Remember, every successful options trader has made these mistakes at some point. As options educator Alan Ellman says, "The difference between successful and unsuccessful traders isn't that the successful ones don't make mistakes—it's that they learn from them quickly and don't repeat them." By understanding these common pitfalls before you encounter them, you can save yourself significant money and accelerate your journey toward consistent profitability.