Mistakes Beginner Options Traders Make: What Not to Do

Thinking of trading for some extra income or even a living? Don't fall into these traps.

Much is in flux at both the global and individual levels right now. Many of us are rethinking how and where we work. For some, the flexibility of working from home has opened doors to new possibilities, including trading stocks or options.

And while options trading can sound like an exciting "work-from-home" career path or side hustle, it also comes with real financial risks. If you're new to trading, here are two of the most common mistakes beginner options traders make and how to avoid them.

Key Takeaways

✅ The classic beginner mistakes: oversizing positions, buying cheap out-of-the-money options, and ignoring time decay.

✅ Trading without an exit plan turns small losers into account-threatening ones.

✅ Chasing trades after a loss (revenge trading) compounds mistakes; step back instead.

✅ Every mistake on this list is avoidable with rules, sizing discipline, and a checklist before entry.

Mistake #1: Using Retirement Funds to Start Trading

A Wall Street Journal article once suggested that it's becoming more acceptable to tap retirement accounts during tough times. While this might make sense in some emergencies, such as saving a small business, it sets a dangerous precedent when it comes to options trading.

Here's a scenario: you're working from home. You don't have a boss staring over your shoulder, and you have a monitor full of stock quotes and watchlists. You're motivated, maybe even inspired, to start trading full-time, or at least during your working day. You've followed the market closely, made a few solid investments in the past, and now you want to level up. But you don't have the $25,000 required to day trade.

It may seem logical to borrow from your 401(k) or withdraw from an IRA. After all, you're investing in your future, right?

Here's the problem: trading, especially with options trading, isn't just risky. It's unforgiving. Even experienced traders lose. A single bad trade can wipe out a significant portion of your capital in minutes. Retirement funds should be protected, not gambled.

If you genuinely want to pursue options trading, build a separate trading account. Keep your retirement savings and emergency fund untouched. Prove to yourself that you can follow a plan, manage risk, and generate consistent results before scaling up.

Mistake #2: Trading on Gut Instinct Instead of a Plan

Many new traders rely too heavily on intuition. They feel like they "just know" when a stock or option will move. Even worse, they heard a trade pitched on CNBC and just bought it. (Stick to highly vetted stock recommendation newsletters)

That might work a couple of times, especially in a trending market, but gut trades rarely hold up over time.

Here's an example: I had a strong feeling that airline stocks would rally. I based it on my travel habits. If I were booking flights, others probably were too. Sure enough, I bought the JETS ETF (an airline-focused fund), and it fell by more than 30%. Do your homework and research before trading.

Had I not acted on that instinct, I would have saved money. It was a speculative trade with no research. There was no backtesting. No system. Just a hunch.

Even worse, early wins based on intuition can breed overconfidence. That's when things go sideways. Without a trading plan with defined entry and exit points, risk parameters, and clear signals, it's easy to freeze when a trade goes against you. And panic trading almost always leads to deeper losses.

The Solution: Have a Plan, and a Coach

When I got serious about trading, I got an options mentor and coach. I stopped risking money I couldn't afford to lose. I stopped relying on gut feelings. I began learning a repeatable, backtested strategy that could be applied across various market conditions.

If you're serious about making options trading a career or even a side income, you need a system. One that's been tested and refined. One that takes emotion out of your trades.

The fastest way to build that system is a structured path: start with the fundamentals of options trading in 21 days, then study which options strategies actually make money before you risk a dollar on any of them.

While trading can be one of the most rewarding jobs in the world, it only works when you approach it like a business, not a gamble.

Before You Trade: 7 Things to Know About How Options Work

A plan only protects you if you understand the instrument you are trading. Line every trade up with your financial goals and risk tolerance, and learn the terminology before you place it. Start with these seven basics:

1. Every option has a buyer and a seller. The buyer (the holder) pays a premium for the right to buy (a call) or sell (a put) the underlying stock at the strike price, usually 100 shares per contract, on or before the expiration date. The seller (the writer) takes on the obligation. Buyers hold a long position, sellers a short one, and only the buyer decides whether to exercise. Call holders expect the stock to rise above the strike; put holders expect it to fall below.

2. The stock price is not the only thing that moves the premium. Intrinsic value (the gap between the stock price and the strike), the time left to expiration, and expected volatility all set the price.

3. Know how both sides make or lose money. Say you pay $4.00 a share ($400 for one contract) for a $100-strike call while the stock trades at $97. If the stock is not above $100 by expiration, the call expires worthless: you lose the $400 and the writer keeps it. If the stock is at $110 at expiration, the call is worth $1,000, so you net $600 after the premium, a 150% return. A $100 put bought for $4.00 works the same way in reverse if the stock falls to $90.

4. Leverage cuts both ways. In that example, $400 controlled $11,000 worth of stock. Strategies built from calls and puts are generally bullish or bearish, and their risk ranges from losing the premium you paid to unlimited losses. Know which you are taking on before you enter.

5. Index options and ETF options settle differently. Options also trade on indexes such as the S&P 500 and the VIX, and on ETFs. Index options settle in cash and are typically European style, exercisable only at expiration. ETF options settle in shares like stock options and are American style, exercisable any time before expiration.

6. Option orders open or close a position. Buying a call or put is "buy to open," and writing one is "sell to open." To exit, a long position uses "sell to close" and a short position uses "buy to close."

7. Your broker has to approve you first. A standard brokerage account does not include options trading unless you request it. The broker will ask about your risk tolerance, financial experience, and financial resources, and may permit only certain types of options trades. Brokers also differ in their options resources and support, so learn your broker's exercise and settlement procedures and commission schedule before your first trade. To compare brokers, see our top options trading platforms.

For the full walkthrough of these basics, work through Options Trading for Beginners: A Complete Guide.

Final Thought

Trading for a living or as an extra income is entirely possible. But it's not easy. And the mistakes that beginner options traders make using retirement funds, such as trading without a plan and relying on gut instinct, are the exact ones that wipe out accounts.

To make real progress, start with a small, dedicated trading fund, follow a proven system, and learn from someone who has already achieved success.

Frequently Asked Questions About Beginner Mistakes

What is the most common mistake new options traders make?

Position sizing. Beginners routinely risk far too much on a single trade, so one bad outcome erases weeks of gains. Cap each trade so a total loss is an annoyance, not a disaster.

Why do beginners lose money buying cheap options?

Far out-of-the-money options are cheap because they almost always expire worthless. The low price hides a low probability, and time decay works against the buyer from day one.

How do I avoid these mistakes?

Write your rules down before trading: maximum position size, exit points for winners and losers, and a strategy checklist. Then follow the rules especially when you least feel like it.

What should I know before trading options?

At minimum: how calls and puts work, what drives the premium (stock price, time, volatility), what assignment means, and how much you can lose on the trade you are about to place.