Foundations
The five mistakes that wipe out new options traders
I have watched the same five errors end accounts for two decades. Here is the list, with what to do instead.
I will not pretend I have an exhaustive list of how to lose money in options. The market is creative. But the same five errors account for most of the wipeouts I have seen.
1. Selling naked calls
A short call without a long call hedge above it has theoretically unlimited risk. Stocks can double overnight on a takeover or a squeeze. I know a trader who sold ten naked calls on a small biotech the morning before an FDA approval. The stock tripled. He owed $180,000 he did not have.
Do this instead: pair every short call with a long call. Even if the long call is $50 wide, your max loss becomes knowable. is the rule, not the exception.
2. Sizing too big
The most common path to a blown account: a trader has three good wins, feels bulletproof, and triples size. The fourth trade goes against them and erases the previous three. Read risk-first-position-sizing if you have not yet. Two percent per trade. Boring. Survives.
3. Trading through earnings without a plan
Earnings is the one event that breaks every model. IV pumps before, crushes after, and the stock can gap 15%. New traders sell premium into earnings because the credits look fat. The credits look fat because the risk is real. Either close before the print, or trade a structure designed for IV crush like a defined-risk iron condor with wide wings.
You can be right about earnings and still lose money. The IV crush makes that possible.
4. Ignoring assignment risk
If you are short a call and the stock closes a penny above the strike, you may wake up Monday short 100 shares per contract. New traders have no idea this happens. They wake up to a margin call. See for the mechanic. The short version: do not hold short ITM options past expiration.
5. Trading illiquid options
Some stocks have weekly options with $10 wide bid-ask spreads. Looking at a 0.30 delta call quoted $0.05 bid, $0.50 ask, you might think you are getting in cheap at the mid. Then you try to exit and nobody is on the other side. You take the bid. The slippage eats your edge.
- Stick to names with daily option volume above 5,000 contracts.
- Spreads under 5% of the mid.
- Open interest at your strike above 200.
The scanner already filters for liquidity, but if you wander into a broker chain on your own, run that check.
What to do next
Print this list. Tape it next to your screen for a month. After every trade, ask yourself which of these five you flirted with. Honesty is the practice.