Option trading is a way for savvy investors to leverage assets and control some of the risks associated with playing the market. With options, it’s possible to profit whether stocks or going up, down, or sideways. You can use options to cut losses, protect gains, and control large chunks of stock with a relatively small cash outlay.

When starting out as an option trader, proceed with caution. Even confident traders can misjudge an opportunity and lose money. Do your research and begin with simple strategies.

We’ve assembled brief overviews of the 10 most common errors in option trading. Take a moment to review them, so you can avoid taking a costly wrong turn.

Mistake #1: Buying out-of-the-money (OTM) call options

Trading OTM calls is one of the most difficult ways to make money consistently. If you’re new to options trading, consider another strategy first.
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Mistake #2: Using an all-purpose strategy in different market conditions

Depending on the market, you’ll want to tailor your options trading strategies. Trading the long spread is a tried-and-true approach that you should understand.
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Mistake #3: Not having a definite exit plan prior to expiration

Even when an option trade is going your way, it’s crucial to have an exit plan in advance. Otherwise, how will you make the right move at the right time?
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Mistake #4: Making up for past losses with risky doubling up

When a trade moves against you, it’s tempting to ignore your tolerance for risk and make a rash decision. Don’t. Instead, try another approach to mitigating your losses.
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Mistake #5: Trading illiquid options

The biggest drawback to this strategy is that, if you initiate or adjust an option position that’s associated with low activity, you run the risk of losing money due to poor pricing.
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Options Trading Mistake #6: Waiting too long to buy back your short options

Don’t wait until it’s too late to make your move, and don’t think that squeezing every last penny out of a trade is worthwhile. Do the right thing.
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Options Trading Mistake #7: Failing to factor earnings and dividend date into your strategy

Avoiding trades with pending dividends is a commonsense approach to investing in options. Understand how the trading season impacts stock volatility and can inflate option prices.
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Options Trading Mistake #8: Not knowing what to do if you’re assigned early

From the beginning, keep early assignment in mind. If you think about it strategically, you won’t be caught in a bind if there’s an irrational and disruptive market event.
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Options Trading Mistake #9: Failing to use index options for neutral trades

Trading neutral on big indices may not sound exciting but this approach can shield you from costly market volatility.
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Options Trading Mistake #10: Legging into spread trades

This is a common mistake among rookies and experienced traders hoping to squeeze the last few bucks out of a trade. Do not fall for it!
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