8 Reasons Why You Are Losing Money Trading Options - Option Posts

8 Reasons Why You Are Losing Money Trading Options

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why you are losing money trading options

A commonly quoted statistic is that only the top 10% of traders are ever successful. If you’ve started trading options with little success, rest assured: you have come to the right place. Here at Option Posts, we believe that trading is a skill that can be taught to anyone willing to learn. Taking the time to learn the right way of trading options is the main thing separating that top 10% from the unsuccessful; with patience and dedication, anyone can become a successful options traders.

Let’s take a look at the 8 reasons why you are losing money trading options.

1. Trading illiquid underlyings

Liquidity is a measure of how easy it is to move in and out of positions without having to give up too much in edge. On one end of this spectrum is real estate. Real estate is a very illiquid asset, meaning that finding a buyer for your home is a long and costly process. On the other end of the spectrum is cash. Cash is the most liquid asset out there – cash is cash. It can quickly be used to purchase any good or service.

In the world of options trading, there are some stocks with liquid options and some with illiquid options. By trading illiquid options, you make it almost impossible to exit your trade without giving up a lot in edge.

Let’s say you are in a profitable options position and would like to book the winning trade and take the profit. If you are trading illiquid options, then you won’t be able to get out of the position for a fair price. If you wait to get a fair price, the stock price might move, and the trade could then become a loss.

2. Trading too big

You don’t want to put yourself in a position where one trade will put you out of business. Often traders see they can make $50 trading one option contract. Then they think, “If I can make $50 trading one contract, then I can make $1,000 trading 20 contracts.” However, if that particular trade loses, you are out of business.

What many people don’t realize is that it is not as simple as increasing your position size to make more money. Larger profit and loss fluctuations instead often cause emotion-based decision-making, which just leads you down a path of failure.

The goal of options trading is to be able to keep the doors open the next day. Trading too big goes directly against this goal.

3. Not trading frequently enough

This mistake why you are losing money trading options goes right along with the previous mistake of trading too big. Trading only a few times also concentrates your risk by increasing the chance that you could lose just due to random chance on every trade.

Options trading is a game of probabilities. Reaching the theoretical probability of success requires many occurrences. Think about a game with a coin flip: it is certainly possible to flip a coin 4 times and have all 4 flips result in heads. However, if you flip a coin 100 times, you are far more likely to reach the actual probability of heads (50%).

The same principle applies to options trading. Placing a few large trades is the same as flipping a coin only 4 times. The key to seeing theoretical probabilities of success is to keep your position size small so that you can place hundreds or even thousands of trades over time.

It is important to trade frequently enough to spread the risk across multiple trades and realize the theoretical probabilities.

4. Trading low probability strategies (directional vs strategic)

Newer traders often think they can pick stock direction using technical analysis or fundamental analysis. However, the cold hard truth is that nobody knows where the stock price will go in the future, not even the Wall Street professionals. Stock price direction is effectively random. Traders who gamble by betting on stock price direction lose money.

This article explains why we prefer to be option sellers.

Traders who buy options to make directional bets also lose money. Options are a decaying asset; EVEN IF you guess the stock price direction correctly, buying options further lowers your probability of success, and you can still lose on the trade simple due to the decaying nature of options contracts.

Instead, it is important to make strategic, probability driven trading decisions. We can focus our efforts on finding high-probability trades and analyzing implied volatility.

5. Not consider IV in your decision-making process

As options traders, implied volatility is at the center of our decision-making process. Implied volatility is where our edge in options trading originates.

Learn what our edge in options trade is here.

For example, in environments of low implied volatility, you want to be wary of selling cheap options. This also might be a time to place strategies that bet on increasing implied volatility.

However, in environments of high implied volatility, you want to be wary of buying expensive options. A high implied volatility environment is one where you want to be selling expensive options.

Understanding the different implied volatility environments is a key consideration in the options trading process to avoid losing money trading options.

6. Going with the herd

Most traders go with the herd. They buy breakouts and sell breakdowns. If the stock price is going up, they will also place options strategies that will benefit if the stock price continues going higher. If the stock price is going down, they will also place options strategies that will benefit if the stock price continues going lower.

If 90% of traders lose money going with the herd, then it makes sense to do the opposite.

This means selling into strength and buying into weakness. As the stock price goes higher, we place trades that benefit from a move lower in the stock price. Or as the stock price goes lower, we place trades that benefit from a move higher in the stock price.

7. Letting profits run and cutting losses short

Letting profits run and cutting losses short sounds great on paper. However, this rarely works in practice. Many subjective, emotion-based decisions are needed to follow this strategy. Any time greed or fear become involved in a trading strategy, you are likely to lose money.

Instead of letting profits run and cutting losses short, we are quick to book our profits and patient with our losses. When trading high probability options strategies, losing trades can become winning trades if given time. If you cut your losses short, you are giving up on the trade when in fact it still has a chance of becoming a winner in the future.

8. Not exchanging unlimited profit for a higher probability of profit

The allure of unlimited profit potential sounds great on paper. However, this unlimited profit potential is at the cost of lower probability of success. It simply isn’t possible to be profitable if you only even see a profit on your trade less than 50% of the time.

To achieve success in options trading, you have to trade high probability strategies. This means you have to give up unlimited profit potential for a limited profit potential in exchange for a high probability of profit. This way you can be successful. If you are able to see a profit on over 70% of the trades you make, then you will be successful, even if the amount of profit per trade is lower.

These are the top costly mistakes options traders make. However, avoiding these mistakes and following our simple guidelines will save you money and lead you down a path of success.

Thank You For Reading!

If this explanation of the top 8 reasons why options traders lose money, let us know in the comment section below!

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  • jeffrey says:

    excellent over view. Does your organziation have a course?

  • jeffrey says:


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