Options Trading for Beginners: Top 5 Options Trading Mistakes

Online gurus tell you how exciting and profitable options trading is. But trading options without knowing what you’re doing is as dangerous as piloting a plane without taking flying lessons.

Case in point – there was one 21-year-old boy who misunderstood his trading statement and committed suicide, thinking that he owed someone $700k!!! He just misread his statement or didn’t quite understand what happened with the assignments.

Many new traders dive in with high hopes but often find out they are making expensive and avoidable mistakes.

I’ll help you explore the common pitfalls and learn how to sidestep them effectively. Whether you’re just starting or trying to improve, this guide will help you master the essentials of options trading for beginners.

Is Options Trading For Beginners Intimidating? Why So?

Many investors shy away from options trading, believing it to be too complex and risky.

Horror stories about large financial losses abound in the media, so readers assume options are and assume it’s a playground best left to seasoned traders and math geniuses

Let’s find out the truth in this section of the article!

The Root Problem Of Options Trading For Beginners

Options are tools—very powerful ones! They share a lot of similarities with common stocks. However, they are more flexible and customizable than stocks and that makes them POWERFUL!

But when it comes to options trading for beginners, fear often paralyzes potential investors. You might have heard these thoughts running through your mind yourself:

• “Options are too risky – I could lose everything and they could wipe me out”
• “The terminology is overwhelming”
• “I don’t know where to start, they are too confusing”
• “What if I make an expensive mistake, can it be salvaged?”

This fear of the unknown often leads to missed opportunities or costly mistakes

These fears are natural, but they’re based on a crucial misconception, that options are inherently dangerous. 

Any tool is both useful and dangerous. Having a car is handy, but if you drive one without knowing how to, you can hurt yourself badly. Using options without knowing how they work is like driving an F-1 racecar without a learner’s permit.

Without the right knowledge, beginners often:

• Overestimate their understanding of the market.
• Ignore the importance of risk management.
• Jump into trades without a clear plan.

This fear of the unknown often leads to missed opportunities or costly mistakes. 

Top 5 Mistakes To Know To Perfect Options Trading For Beginners (And How to Avoid Them)

With appropriate awareness and training and an awareness of common pitfalls options are incredibly valuable, flexible tools to boost profits, generate income, and protect gains. Let’s help you understand some crucial mistakes to avoid so you can nail the art of options trading for beginners.

Some of the smartest options investing strategies begin with embracing and fixing these mistakes. 

1. Skipping the Fundamentals

Many beginners jump into trades without really understanding what puts and calls are and without knowing key concepts like volatility, strike prices, or expiration cycles.

An investor wrote me the other day, complaining that his option pricing calculator was “broken.” He had bought far out-of-the-money put contracts on NVIDIA. After he bought the contracts, NVIDIA’s price did take a big tumble and he thought he was going to make a killing on his option trade.

When he looked at his pricing screen, though, the price his (still out-of-the-money) put options were trading for was about the same or a little less than the price at which he bought them. “How can this be?!” He asked me.

He did not understand what a huge effect the “volatility smile” has on far out-of-the-money option contracts so he paid far too much for the contracts he bought and couldn’t sell them back at a good price. I advised him to sell the contracts and eke out what he could of his original investment.

He decided to hold onto them, though, and a combination of time decay and market movement ended up making his contracts worthless in the end.

This is a sad but true story and completely avoidable if you understand option fundamentals.

Solution:

Take a foundational course (like our free introductory options trading course) to grasp the basics before risking your money. Knowledge is your first and strongest line of defense.

Deep Dive:

• Learn the terminology (calls, puts, premiums) thoroughly and understand how to visualize the bet you’re making when you trade
• Understand how options are priced and how pricing quirks can affect an investment
• A lot of gurus spend a lot of time talking about “the Greeks” (delta, theta, gamma, vega), but only one of those measures is useful to most investors—learn which one!
• Understand simple ways of understanding how options will behave in different market conditions

2. Overtrading

Chasing every market movement can quickly lead to unnecessary losses and increased transaction costs.

Most option gurus are ex-traders. The reason they are ex-traders is that powerful, algorithmic trading programs do their jobs a lot better than they can, so there is no way for them to make money anymore, except by flogging subscription-based tout services.

The only option traders making money these days are sitting at trading desks in New York, earning the bid-ask spread by filling orders for institutional clients.

Ex-traders know how to trade, but very few of them know how to invest. Traders don’t have an opinion about the value of a security, but when they are on a trading floor (most of which are gone now…), they can look at chart patterns and imagine they see some trend and hear the sound of people getting excited or losing enthusiasm.

They base their trades on their ideas about crowd psychology.

They set up complex trades designed to last for a very short time and to make sure they are not exposed to too much risk (in case the crowd psychology play doesn’t work out).

The problem is, because these trades last such a short time and are so tightly protected from stock movements if they want to make any money at all, they have to use a lot of leverage.

A single trader may be controlling securities worth tens of millions of dollars hoping to make thousands of dollars on a successful trade.

Plenty of academic studies have shown that when retail investors try to use these techniques, the only thing they do is pay for their brokers’ kids to go to college.

They lose money from excessive trading fees, jumping in and out of trades willy-nilly, and getting scared and reversing out of trades at a loss when they realize how highly levered they are.

Solution:

• Think like an investor, not like a trader
• Invest when you have insight into the value of the underlying security
• Use the inherent directionality of options in your favor—this means low-leverage, simple trades, not high-leverage complex ones

Deep Dive:

• Understand how to visualize the risk you are taking, whether you invest (long or short) in a stock or an option
• Use options to tweak the risk-reward balance on underlying positions you own or want to own
• Avoid revenge trading—making impulsive trades to recover losses.
• Unsubscribe from guru-led options tout services!

A lack of strategy often leads to impulsive decisions. Without a plan, you’re more likely to succumb to emotional trading—buying high and selling low.

3. Using Options as Your Portfolio’s “Main Meal”

I talk about portfolio strategy as being a meal. Options represent spice and extra flavor—they should not be a “staple.” Can you imagine eating a meal of only salt, sugar, and hot sauce?

This is what a lot of option traders do every day—it usually ruins their digestion!

An investment portfolio is like a dinner. The main part of your dinner should be the proteins and vegetables your mom told you to eat growing up.

Using options to spice up those proteins is a lot better way to approach trading than by overleveraging in option contracts that expose you to an immediate realized loss if you’re buying them or to huge downside risks if you’re selling them.

Without a portfolio strategy, traders make impulsive decisions. Without a plan, you’re more likely to succumb to emotional trading—buying high and selling low.

Solution:

Before entering any trade:

• Understand what option “spice” you want to add to your stock or currency meal
• Understand how adding options to a position changes your financial exposure. Don’t bet more than you have!
• Stick to your plan, learn from your mistakes, improve your plan, and repeat

Deep Dive:

• Create a journal to document why you entered each trade, your expectations, and the outcome.
• Review your trades regularly to identify patterns of success and failure.
• Develop a checklist to ensure every trade aligns with your plan.

4. Overleveraging Positions

One of the biggest draws of options is leverage—the ability to control large amounts of assets with a relatively small investment. However, overleveraging can amplify losses just as much as it does gains.

Every major financial disaster, bar none, involves investors getting excited and leveraging their position too heavily.
The Great Financial Crisis in 2008-2009 was caused by overleverage. Fundamentally, banks were selling insurance contracts (an insurance contract is the same as a put option) at too low of a price.

Because they sold the contracts at too low of a price, they had to sell many more contracts than they had the assets to support. It made them rich for a while, then it suddenly turned them (and a lot of other people) into paupers.

This is called “picking up nickels in front of a steam roller.” Seems like easy money when you first try it, but if you trip, the results are terrible. I see people doing this all the time with covered calls and short puts.

They have no idea what the exposure is on their position is, but they know that if they sell a lot of contracts, they get more money. It works fine until the stock price plummets!

Solution:

• Understand how to visualize the risk you’re taking when you are buying or selling options
• Learn how to size your position sensibly, so even if the trade moves against you, you don’t need to sell your house
• Avoid placing “all-or-nothing” bets. If you want to bet like that, go to Las Vegas with a thousand dollars in your pocket. You will probably leave Vegas $1000 lighter, but you might get lucky!

Deep Dive:

• Understand the risk/reward profile of each trade before executing
• Understand how buying or selling a single contract will affect your risk profile, then figure out how many you can trade without going outside your risk tolerance
• Avoid the temptation to pick up nickels in front of steamrollers

5. Failing to Understand Time Decay

Options lose value as they approach their expiration date. Beginners often underestimate how quickly this time decay can erode potential profits.

If you are selling options, time decay is your friend. If you are buying options and you’re over-levered, time decay is your worst enemy!

Buying an option is like harpooning an iceberg in Greenland and towing it down to Florida to sell. When you first start, the water is cool, so the iceberg only melts a little. The closer you get to Florida, though, the faster the ice starts to melt.

Understanding the dynamics of time decay can help you decide whether it’s the right time to close the trade or to keep sitting on it a while longer to realize more profits.

Solution:

• Understand the dynamics of time decay and how it can affect the investment you’re making
• I always say to “sell options in travel size” (i.e., short-term options)
• When you buy options, it’s best to buy them in “family size” (i.e., long-term options), but there’s a wrinkle to that involving leverage

Deep Dive:

• Learn how to visualize the drop-off in time decay using a tool I call the “BSM Cone”
• Learn how to reduce leverage to decrease your exposure to time decay when you buy options (see bonus below)
• Avoid buying weekly options at all costs!

Best Practices For Options Trading For Beginners

1. Educate Yourself: Markets evolve, but understanding the fundamentals will allow you to find your way through any market environment
2. Start Small: Begin with a small investment to limit your risk while you learn.
3. “Eat” Sensibly: Overlay options on stock or currency positions you already hold. The positions you hold are your proteins and vegetables; options are the spice
4. Keep Track of Progress: The only way to get better is to try, reflect on the outcome, and revise your approach the next time you try. Maintaining a trading journal is one key to building skills and confidence.
5. Avoid Tout Services: Gurus want you to stay subscribed to their service so they can keep taking their monthly fee. They get paid as long as you’re confused. It’s your money—you deserve to know what you’re doing and make your own decisions alone

Options Investing & Trading: Real-Life Use Cases 

Use Case 1: The Impulsive Trader

A beginner buys overpriced, short-term, out-of-the-money call options on a popular tech stock without knowing that the company’s earnings report is due the next day. The stock jumps on great results but option prices DROP due to lowered uncertainty. The options expire worthless even though the investor was directionally right.

Lesson: Understand the effect of upcoming events on implied volatility and option prices.

Use Case 2: The Overconfident Investor

Another trader bets their entire portfolio by buying short-term out-of-the-money options contracts based on their analysis of the stock chart, expecting a quick gain. everything.

They don’t understand that buying time value should be considered an IMMEDIATE REALIZED LOSS. The stock moves against them, the value of their options collapse, and they are back at square one again.

Lesson: If you want to gamble, go to Las Vegas. If you want to invest, it’s best to diversify.

Use Case 3: The Safe Investor

A trader buys a stock and enjoys a nice run-up in stock price. Rather than selling the stock, they decide to sell out-of-the-money calls to “lock in gains.”

The company reports disappointing earnings and the price plummets wiping out the trader’s unrealized gains and then some. They realize they haven’t “locked in gains” at all but rather extended their exposure to downside risk.

Lesson: Understand the risk/reward profile of your option strategy.

Why Avoiding These Mistakes Matter To Option Trading For Beginners?

Don’t let fear of making mistakes keep you from the powerful benefits of options trading. Remember: every successful options trader started exactly where you are now.

Want to avoid these costly mistakes and build a strong foundation in options trading for beginners? My free course is designed specifically for beginners like you. You’ll learn:

How to analyze opportunities like a pro

• Risk management strategies that protect your capital
• Simple but effective investment strategies
• How to avoid the mistakes I’ve discussed

Ready to start your journey toward becoming a confident options investor? 

Conclusion: Take the First Step Now!

Also, options investment success isn’t about avoiding all mistakes – it’s about learning from others’ mistakes so you don’t have to make them yourself.

Also, making mistakes about the settlement cycles or misjudging market mechanics can cost you a lot of money. Remember the boy who committed suicide? – I spoke about it earlier in this article! 

These mistakes are all preventable with the right practical advice and proper guidance!

Here’s what successful options traders do differently:

• They start with foundational knowledge
• They practice with paper trading
• They follow strict risk management rules
• They understand the power of patience
• They have a mentor or guide

If you’re interested in practical mentorship on options trading for beginners, you can sign up for my free beginner-friendly course. Or take the Fundamentals course to become a more confident options investor.