Top 11 Common Options Trading Mistakes to Avoid

Common Options Trading Mistakes: If you make a lot of money from options trading, you will make a small mistake and lose all your money. There are many traders who are not able to make money in options trading, they made money today and then made a loss on the next day. They are not able to work on a consistent basis. 

Many traders think that their setup is perfect and they will become profitable. People mostly keep running after the setup. Some will use EMA setup and some will use different strategies. 

But you have to understand that this is the game of psychology and risk management. You can’t become profitable just by setup and strategy. For this, psychology and risk management are very important.

So in this article, you will get the 10 most common mistakes made by option trading due to which you incur losses most of the time. If you avoid these mistakes, you can reduce your losses and you will be able to remain in overall profit. 

Top 11 Common Options Trading Mistakes to Avoid:

Mistake 1: Trading with Full Capital 

The biggest mistake people often make is to invest their entire capital in a single trade. If they suffer a loss due to this, they do not have funds to trade the next day. For example, if your capital is 15k, you will use only 7k to 8k from your entire capital. You should do as much as you can with your capital, even if you suffer a loss, you can manage your risk and then take a trade on the next day. 

And in such a situation, let us assume that you make a profit of only 1000 rupees, then your 15k becomes 16k. But if you suffer a loss, it will also be only 1000 rupees because you will always have a stop-loss, so you will be left with 14k and then you will be able to take more trades. 

So even if a profit of Rs 1000 does not seem much to you, because in options trading, 10k can become 20k in just 5 minutes. But there can also be a loss accordingly, so slow progress is better than no progress and even better than loss.

If you trade with a small portion of your capital, it may be better for you and you will be able to stay in option trading in the long term.

Mistake 2: Not Having a Trading Strategy 

If you are buying a call or put of any index after seeing that its price is increasing, then in most of the cases, whenever you buy, the price may start falling because you may have bought near the resistance. 

While doing options trading, you must follow some strategies, it can be support & resistance, candlestick patterns, chart patterns or any other strategy, but whenever you are taking a trade, you should have a valid reason as to why you took that trade and why its price will increase. [Common Options Trading Mistakes]

Read More: How to Become an Expert in Options Trading 2024

Mistake 3: Choosing the Wrong Position Size

Suppose you are trading with only 1 lot in any index, here your position size is small, so you will not be afraid even if the market does not go in your favor. Only then you will know that your maximum loss can be this much and you can continue that trade. 

If the market goes 20 to 30 points in your favor then you can still exit the trade. But when your position size is wrong or too big, if you are trading with 10 or 12 lots that means with 500 quantity. There you will start feeling scared whenever it goes down by even 10 points, then you will know that you are going to lose Rs 5000. 

So what happens in such scenarios is that you are not able to control your emotions, both fear and greed come in excess. If the market goes down a little, you will start feeling afraid that you are going to suffer a loss. But if it goes up even a little. You will start seeing profits and then you will start holding for a long time. 

That’s why it’s very important that you choose the correct position size. If you are starting options trading, then you can start with a small position size i.e. 1 or 2 lots. Don’t do options trading with a large position size because you can’t control your emotions on both sides of fear or greed. [Common Options Trading Mistakes]

Mistake 4: Ignoring Volatility 

Implied volatility identifies the movement of options on any particular stock or index, that means we can know that the particular stock or index can move. We can also see this in the options chain where we can see the value of implied volatility of the call and put side. 

If this value is less in any index, if the value of at the money option is 10 then it means that there will be movement in the index. If there is no movement then how will the price of options increase and if the implied volatility is high like 17 or 20, so we may see a big movement. 

Increase in IV can also be reason for news or events. IV in stock options are always high and IVs of options are always high on put side. Be it stock or index, they will always be in put side. If you check this value then it’s always in ATM. Check OTM’s in IV which are not that useful, that’s why volatility becomes very important in options trading, you can never ignore it. 

Mistake 5: Fear of Loss

You have decided to enter a trade after analyzing the price action on any stock. After sometime, according to your analysis, the price comes to your entry-level, but you do not enter thinking that you will incur a loss.

Later the price moves up in your direction and you keep watching but after a point, seeing the price move in your direction, without thinking anything you enter the trade at a higher level than your entry level but the price goes up a little and then starts to reverse.

Since your entry is at a higher level, your stop-loss becomes very big and after making a small mistake, you panic and exit. As soon as you exit, the price moves in your direction and hits the target profit. This happens with many traders, after proper analysis the price comes to your entry level and you should enter the trade without any fear. [Common Options Trading Mistakes]

Read More: How to Make Consistent Profit in Option Trading 2024

Mistake 6: Exiting Winning Trades Early

Anytime you enter a trade after a proper price action analysis, your stop-loss and profit target should be defined in advance. You should not exit the trade until your stop-loss and profit target is hit. 

Many new traders hold a losing trade for a long time without setting a stop-loss, but as soon as one of their trades makes a small profit, they follow the reward ratio without any risk and book a small profit. Due to this their risk management completely fails. 

Unless you get 1:2 risk ratio after entering a trade, you should not exit with full quantity. Instead of doing this, you can book partial profit by using trailing stop-loss. 

Mistake 7: Not Managing Risks

If we talk about options trading, it’s very risky, that’s why it becomes very important to follow risk management. Before taking entry in any trade, it’s very important to know what is your stop-loss level in that trade.

If your profit target is smaller than the stop-loss then you should not enter your entire quantity in such a trade and if you are an options trader then it’s very important to follow at least 1:2 risk to reward because in options trading the win rate is very little.

Before taking entry in any trade, consider how much risk you can take. If any entry follows your risk management then enter in that trade, otherwise it’s wise to wait. [Common Options Trading Mistakes]

Mistake 8: Overtrading

Many traders are such that they do not take trades for a long time, so they look for opportunities as per their convenience. If you do not get the opportunity to take trades or do not have your own setup in any trade, then you can avoid taking trades at that time. Whenever your setup is made in any trade or you feel that you can get profit from this trade then only you have to take the trade. 

At the same time, if you are making profit then do not overtrade due to greed and if you are in loss then do not overtrade without thinking in order to recover the loss. Because by doing this you will not be able to control your emotions and then your loss will increase, so you will have to keep this thing in mind also. 

Many new traders are in profit in the first hour of market opening due to high volatility due to which their confidence level becomes high. But as soon as the market comes in its second half, due to overconfidence, without price action analysis they take random trades and go into loss. In order to recover the loss, don’t form proper setup on the chart, yet they make the loss bigger by entering the trade. [Common Options Trading Mistakes]

Read More: Best Time Frames for Option Trading in 2024

Mistake 9: Not Using Stop-Loss Orders

If you want to become a profitable options trader, then you will have to place proper stop-loss orders. Many traders are such that they do not put the stop loss in the system but in their mind. They think that if the loss is above 2k, then they should exit the trade or I will exit the trade if I make a profit of 10k.

But when he suffers a loss, he is not able to take an exit and gradually the loss becomes bigger and bigger. He doesn’t think about the profit but thinks that only if the loss is recovered, he will take the exit and then the loss increases. This is why placing stop-loss orders is very important because many traders are unable to control their emotions.

Mistake 10: Random Trade Entries

If you want to become profitable in this type of trading, then you have to make a plan and trade. If you analyze to buy while taking the trade and follow it and enter but your stop-loss gets hit, then you analyze once again. You enter the trade but this time also your stop-loss gets hit due to which you incur a huge loss. 

Despite entering the trade after analyzing it twice, you make random trade entries without any proper plan to recover the loss on the same day and further increase your loss. By the end of the day, your loss becomes so big. It is known that its can effect your psychology, that’s why it is always better to avoid random trade entries. [Common Options Trading Mistakes]

Mistake 11: FOMO Trading 

Many beginners end up losing in the process of FOMO trading. You must have often heard that you have to be fast in options trading. If you are buying and you miss the opportunity then it’s missed. So here it’s due to FOMO or fear of missing out. Many traders keep doing impulse trading.

Whenever they see the market, they think that it is according to their setups, now the market is going to rise or it is going to fall and they buy at this time, but it does not happen in reality, you get maximum of 2 or 3 trading opportunities in a day. You have to find it and you have to wait when it will come into your setup or in your level.

You always have to take trade as per your setup, if it is not in buy or sell zone then you can avoid trade at that time, but many beginners make this mistake and end up incurring losses due to this FOMO trading. [Common Options Trading Mistakes]

Conclusion 

Due to overconfidence, many traders don’t use their own setup or strategy and start taking any random trade due to which they incur huge losses and due to unnecessary losses, some traders get depressed and repeat their mistakes from the next day also. 

That’s why you should never change the market. If you suffer a loss on any day, then taking a small loss and stopping trading that day is the first step to becoming a profitable trader.

I hope you have liked the information we have shared in this article, to know more about trading you can read our other articles too.  [Common Options Trading Mistakes]

Read More: How to Select the Best Stocks for Options Trading

FAQs:

Q1. What is the common mistake in option trading?

Trading with your full capital, not implementing risk management, not setting stop-loss, due to fear & greed and overtrading, all these are common mistakes that many traders make in options trading.

Q2. Why do most people fail in option trading?

Most people fail in options trading because they do not have a proper strategy, do not have a trading plan, do not use their own setup, and do not learn how volatility affects options pricing.

Q3. Do people get rich from options?

With patience and discipline, you can become rich in options trading. For this, it can probably take 2 to 3 or even 5 years. Once you start understanding the market and gain experience, then no one can stop you to becoming rich in options trading.

Q4. How many options trader are successful?

The success rate of option traders is estimated at 75%.