Top 5 Best Ways to Lose Money Trading Options

We talk a lot about what traders should do stay disciplined as they wade through the often choppy waters of the market. Today, we are looking at the opposite: what traders shouldn’t do. We take out our list of Top 5 Best Ways to Lose Money with Options Trading.

The well-known options trading subreddit Wall Street Bets has perfected this art, so alongside each of these warnings will be a cautionary tale from Reddit’s most popular trading community. If you are easily offended by crushing option lossesthis is your trigger warning: turn around now.

Always here ? Good. Let’s start with a simple way to lose money with options trading:

5. Buy too out-of-the-money options

This one is common among beginners in options trading. It goes like this:

  • You think stock XYZ is rising.
  • You buy a call option.
  • The stock is $100 per share, but you buy the $150 strike call with a delta of 0.0067.
  • During the week, the stock climbed 5% to $105 per share! What now!
  • Wait a second… Why aren’t my options increasing?

Answer: You bought options that have a very low probability of profit. Yes, you were right about the direction of stock movement, but it wasn’t moving quite fast to increase the likelihood that your option will expire in-the-money on the expiration date you choose!

In short: Theta ate your options

To avoid this error, familiarize yourself with delta. Delta is the Greek option that measures your option’s sensitivity to dollar movements in the underlying stock. But many also view the delta as an indicator of the probability of an in-the-money option expiring. That 0.0067 delta option you bought? You can think of this as having a 0.67% chance of expiring ITM.

Translation: You may as well buy a scratch ticket if you are looking for these odds.

Pictured: What happens when you bet big on low probability outcomes?

Speaking of expiration dates, theta decay, and buying low quality options, here’s another common way for options traders to lose silver:

4. Buy options too close to expiration

This story is similar to the previous one.

  • You think stock XYZ is rising.
  • You buy a call option.
  • The option expires tomorrow.
  • As the day progresses, the stock turns around, ending the day flat.
  • But wait…the stock hasn’t gone down from when I bought the option to now, so why is my option constantly losing value?

Answer: Long options like calls and puts are subject to what is called theta decay. Like delta, theta is a Greek option. However, instead of measuring sensitivity to movements of the dollar in a stock (like delta), theta measures the sensitivity of options to time. The closer your option is to expiration, and the further your option is out of the money, the more sensitive your option becomes.

In short: You have theta Again! At least the premium collector who sold you this option is happy.

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To avoid this error, familiarize yourself with the theta decay curve.

Source: Market Rebellion

Source: Market Rebellion

Basically, time decay is not then bad if your option has more than 60 days to expire. But over time, the decay begins to accelerate, reaching a maximum speed around 14 days. If you are trading an option with less more than 14 days before expiration, that’s okay, but you better have a plan. Market Rebellion co-founder Jon Najarian calls these short-term options trades “the deep end of the pool.”

Translation: If you are new here, this is an area you may want to avoid…unless you have the advice of a licensed professional.

Want to trade short-term options with the guidance of a licensed CMT? Try weekly rebel. Get two easy-to-follow, momentum-driven trade ideas designed to capture technical breakouts and breakdowns – delivered to your inbox every week.

Pictured: inexperience + many, many short-term options.

Pictured: inexperience + many, many short-term options.

Alright, maybe you’ve traded a few options before. You know the basics – don’t go overboard OTM, be careful with short-term options… But here’s another way options traders can get trapped in a low-quality position:

3. Trading Illiquid Options

This is especially common when entering multi-leg options trades on low volume stocks. It goes like this:

  • XYZ stock isn’t getting much action – you think it’s going to trade flat for a while.
  • You are selling a short iron condor – a four-legged spread.
  • When you enter the trade, you notice that the bid/ask is several dollars wide.
  • You’re struggling to get filled at the average price, so you have to continually lower your maximum credit to get filled.
  • You are finally filled for an unfavorable price, and you start the compromise with a “loss of paper”.
  • As the week progresses, the stock remains mostly flat – that’s what you wanted! But now you have to deal with the same problem again: being filled at a reasonable price as you try to close the trade.
  • You are faced with two options:
    • Wait, hoping your order fills before the stock leaves your breakeven zone.
    • Overpay to close your spread, sacrificing some or all of the profits you have made.
  • Well that’s frustrating. How can I avoid this problem?
call to action

Answer: To familiarise with open interest and volume. These are two important liquidity metrics that every options trader should understand, even if you are not trading spreads. The volume indicates the total number of options contracts bought and sold for that day. Open interest indicates the total number of active option contracts.

In short: It’s not just to be rightit is choose the right tool For the job.

Translation: If volume and open interest are low or close to zero, so is your probability of getting a good fill. Remember that the market maker will need to match the highest bid with the lowest bid – this is the average price.

It is important to look for tight bid/ask spreads whenever possible. If the spread is particularly wide, it’s a good sign that you’ll struggle to reliably fill your order near the average price.

There isn’t really a good ‘picture’ of someone frustrated trying to get filled on a low volume option, so here’s an example of what a low liquidity options chain looks like instead .

Notice the low volume and the wide gaps between supply and demand.  Entering these contracts is like entering an empty room.

Notice the low volume and the wide gaps between supply and demand. Entering these contracts is like entering an empty room.

Until now, it was a question of avoiding poor quality options. The next big “don’t” is to avoid a poor quality trade style.


Made famous by the Wall Street Bets options trading subreddit, YOLOing means allocating your entire portfolio to a single trade – despite the potential reward, the high risk means the YOLO (You Only Live Once) trade is highly, strongly, not recommended.

  • You are Of course this XYZ stock is going higher today.
  • So sure in fact that you are betting your entire wallet on this outcome.
  • Surprise: That’s not the case. You are wrong. And because you used your entire wallet to make that bet, the damage is magnified.
  • How can I make sure this doesn’t happen again?!

Answer: Start building your risk management skills. Options leverage is an incredibly versatile tool that can help traders risk less – allowing traders to risk only a portion of the value of 100 shares in exchange for leverage of up to 100 shares. But with great power comes great responsibility – and it’s your responsibility not to abuse options leverage with high-risk scenarios.

Translation: You may be an excellent trader, but no one is perfect. If you YOLO your entire account, trade after trade, it only takes one mistake to undo years of hard work.

In short: Don’t end up like this guy :

Screenshot 2022-07-20 at 14:38.25

YOLO: ✔️Short term: ✔️MTO: ✔️— That’s literally ¾ of the stuff we’ve covered so far!

Okay, so far these traders have made serious options trading mistakes. But they all avoided the cardinal rule. They all avoided the worst mistake on this list:

1. Betting Money You Don’t Have: Naked Options and Margin

Yes. These traders lost a lot of money. Yeah, they’re probably all pretty sad about it. But at least they only lost to zero. Here’s an even worse scenario:

  • Your brokerage allows you to deploy naked options strategies, withholding some collateral and hedging the rest with margin.
  • You decide to ignore this glaring risk and instead attempt to collect the premium from a short gap before the XYZ stock earnings event.
    • Gains are associated with high cost options and high volatility moves.
    • In a short spread, your goal is for a stock not to move.
  • Unfortunately, the stock moves – a lot, creating a bigger loss than the value of your portfolio overnight.
  • The loss triggers a margin call, your brokerage liquidates your portfolio and you are left with a negative value – a debt you must now pay in return for your options trading pride.
  • All I wanted was to collect a bounty! Is there a way to sell options without incurring infinite risk?

Answer: Yes, there are many strategies for selling options with a defined risk. Market Rebellion has entire departments dedicated to doing just that! Strategies such as credit spreads, short iron condors, short iron butterflies, and covered calls are just some of the ways you can sell options without risking the trade going negative.

Translation: By selling an option versus another option, you set your maximum risk.

In short: Like YOLOing, one wrong move can undo years of hard work. Unlike YOLOing, this strategy can send you out of business. Bare options: never, never, never, never.

Unless you want to end up like these guys:

Screenshot 2022-07-20 at 15.51.33 PM

The essential: Looking at photos of mass casualties is all fun and games until it happens to you. By avoiding these five critical options trading mistakes, it is possible to have a long and successful career in options trading.

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