You YOLO’d on that short put, the stock tanked, and now you’re stuck buying shares way above market value.

Whoops — didn’t think that could actually happen, did ya? Tough luck; nuking your entire bankroll on one dumpster fire of a trade isn’t exactly fun. Time to get smart, study up, and avoid turning your gains into painful lessons next time.

Common Mistakes in Options Trading

Look, everyone’s got a little bagholder in them, but wouldn’t you rather learn from some other ape’s dumb moves than your own? Do your due diligence on these five classic screw-ups so you can spot the dips, avoid the margin calls, and keep your tendies safe.

1. The Dangers of Over-Leveraging

Leverage lets you swing for the fences with money you don’t even have, and that can turbocharge your gains if the trade hits just right. However, over-leveraging can turn a little mistake into a financial apocalypse. Here’s why over-leveraging is dangerous:

Amplified Losses: A small unfavorable move in the market can cause huge losses when leverage is involved. For example, a 5% drop in a heavily leveraged trade can wipe out your account balance.
Margin Calls: Your broker will demand that you deposit more money to cover your losses if they exceed what you have in your account. If you can’t meet the margin call, your broker may liquidate your positions, often at a loss, wiping out your entire investment bankroll.
No Room for Error: When you over-leverage, you’re effectively gambling your entire account on a single trade, hoping the market will move in your favor. If it turns out to be a bad trade, you have no cushion for your recovery, which can destroy your whole account.
Emotional Stress: The constant pressure of high-stakes trades can lead to poor decision-making, panic selling, or doubling down on bad trades. This emotional strain can also make it harder to stick to your trading plan, leading to impulsive actions that compound losses even further.

Over-leveraging may seem appealing when you’re chasing big gains, but it’s a recipe for disaster without proper risk management. Remember, successful trading is a marathon, not a sprint. Keeping your account intact is just as important as making a profit.

2. Avoiding Emotional Trading Decisions

Would you pile into a Lambo, fueled by FOMO and caffeine, and floor it while blindfolded? That’s what emotional trading feels like; it’s reckless, reactionary, and almost guaranteed to end poorly. When you trade based on emotions, your logical thinking takes a back seat, and instead of making calculated decisions, you’re driven by adrenaline, fear, or greed, often with no clear exit plan.

The real danger of emotional trading comes when the market makes big moves, like either a sharp drop or a sudden rally. Seeing red on your screen might tempt you to sell in a panic, locking in losses right before a rebound. Or you might buy into a hype-driven rally, overpaying for a stock or option, only to watch its value crash shortly after. Each bad move piles on top of the last, turning into a fragile house of cards that’s bound to collapse.

To avoid emotional trading, take steps to ground yourself in logic and discipline. Set clear rules for your trades, like profit targets and stop-loss levels, and stick to them no matter how the market moves. To avoid impulsive decisions during market volatility, pause to assess the situation, review your strategy, and make sure you base your actions on facts rather than fear.

3. Misunderstanding Implied Volatility

If you don’t get how implied volatility works, you’re setting yourself up to get stood up, even when you’re right about the stock’s direction. IV reflects the market's expectations for how much a stock’s price will move in the future. It plays a huge role in determining the price of an option. When IV is high, options premiums soar; when it’s low, premiums drop.

Picture this: You might buy a call option on a stock you believe is about to skyrocket. But if the IV is already sky-high (perhaps due to an upcoming new product announcement or GDP report), the option is more expensive because everyone else is expecting a big move, too. Even if the stock goes up, you might not make much — or anything — due to volatility crush. This means that IV typically drops as market uncertainty fades after the big event, so your option loses value.

Or, you might snag a “deal” on a cheap option on a stock with low IV. However, if the stock barely moves and the IV stays low, the option might not increase in value enough to offset the premium you paid.

Always check the IV before making a trade. Compare it to the stock’s historical volatility to see if the current IV is unusually high or low. Sell options and take advantage of the inflated premiums if IV is elevated. If it’s low, only buy options if you expect a major event to push the stock price beyond what the market currently anticipates.

4. Failure To Manage Risk

When you don’t have a plan to protect yourself, one bad trade can wreck your entire account, and it happens faster than you think. You expect a stock to move in your favor, so you buy options. Instead, the market tanks, and your trades go so far out-of-the-money that they’re practically worthless.

Logic is telling you to cut your losses, but you freeze, holding onto the hope that the stock will recover before expiration. More often than not, that recovery doesn’t come. This isn’t just a frustrating experience; it can burn through your bankroll and leave you with no capital to make a comeback.

The good news is that this is entirely preventable with proper risk management techniques:

Set Stop-Loss Levels: Decide first how much you’re willing to lose on a trade before you enter it. For instance, set a stop loss to sell an option if it loses 50% of its value, protecting your remaining capital.
Diversify Your Trades: Spread your investments across multiple positions instead of going all-in on one. This way, a single poor decision won’t blow up your entire account.
Use Proper Position Sizing: Risk only a small percentage of your total account — experts typically recommend 1% to 3% — on any one trade. This helps you manage losses while staying in the game for the long haul.

Risk management won’t keep losses from happening, but it can limit them. Ultimately, it’s better to take a small, controlled loss than to watch your account bleed out from one bad decision.

5. Ignoring the Greeks

The Greeks measure how an option’s premium responds to various factors like stock price movements, time, and IV. If you brush them off, you might get lucky at first. Eventually, however, the lack of awareness will catch up to you and lead to losses.

Delta

Delta measures how much the option’s price changes as the stock price changes (e.g., a delta of 0.50 will move the premium 50 cents per $1 change in stock price). You can plug delta into your advanced profit and loss calculations to get a more precise estimate of your potential profits. Not accounting for it at all can leave you caught off guard when the market shifts.

Gamma

Gamma measures how fast delta changes as the stock price moves. If you’re trading short-term options and forget about gamma, you might wake up to a position where your risk is spiraling out of control. For instance, a small stock price movement can exponentially increase delta on an option with high gamma, making your trade more volatile and harder to manage.

Theta

Theta represents time decay, or how much your option premium loses each day as it approaches expiration. Disregarding theta is a recipe for disaster, especially with short-dated options. Even if the stock is moving in your favor, your option’s value might slowly bleed away. By the time the stock hits your target price, the premium could be close to zero.

Vega

Vega measures how sensitive an option’s price is to changes in implied volatility. You could get blindsided by volatility crush if you don’t understand how vega works. For example, buying an option during high IV might seem like a good idea, but the market will correct itself, and your option’s price can plummet no matter if the stock price is doing what you need or not. Vega is especially important when trading during volatile market conditions or around news events.

Rho

Rho measures how much an option’s price changes when interest rates fluctuate. While it’s often overlooked, ignoring rho can be risky, especially in environments with rising or falling interest rates. Rho becomes particularly important forLEAPS, as interest rate changes have a more significant impact over extended timeframes.

Real-World Examples of Trading Errors

Let’s put the theory into practice with these real-world examples of options trading errors.

1. Over-Leveraging with Naked Call Options

Imagine Margaret sells 50 naked call options on $META, betting that the stock price will remain stable. At the time, $META is trading at $565.11 per share. This means she’s controlling 5,000 shares with a total exposure of $2,825,550 and has nothing to back it.

Out of the blue, $META announces the new Quest headset, causing the stock price to surge. For each dollar increase in $META's price, Margaret owes an additional $5,000. As the stock continues to rise, she faces a margin call, forcing the liquidation of all her other assets at yard sale prices to cover the escalating losses.

2. Misunderstanding IV Impact

Benjamin anticipates that $AMZN, currently trading at $201.45 per share, will report strong earnings. He purchases call options just before the earnings announcement without paying attention to the moon-high IV, which significantly increased premiums due to the upcoming event.

After the earnings report, $AMZN's stock price rises modestly. However, the resulting volatility crush leads to a sharp decrease in the option's value. Despite the correct prediction of the stock's direction, Benjamin loses money because the declining IV reduced the premium more than the stock's price gain.

3. Neglecting Risk Management

Confident in $MSFT$ growth prospects, Col. Potter buys several long call options with the stock trading at $415.49 per share. Sure of the stock's upward trajectory, he doesn’t bother to set stop-loss orders or implement any hedging strategies.

Unexpectedly, a disappointing revenue outlook surfaces, causing $MSFT's stock price to decline. Instead of mitigating losses, Col. Potter holds onto the options, hoping for a rebound. But, the stock continues to fall and his options become worthless by expiration. He loses all of his invested capital.

Don’t Lose Big — Know the Options Trading Mistakes To Avoid

Dodging options trading pitfalls is like trying to moonwalk through a minefield, and you don’t want to figure it out the hard way by nuking your own account. Your goal is massive gains, not brain-melting losses, right? The first step to going pro is learning the biggest options trading mistakes to avoid before you YOLO yourself into oblivion.