The #1 Mistake New Options Traders Make (And What to Do Instead)

A practical guide to building an options trading process that actually works.

Here's something nobody tells you when you start trading options: Being right about a stock's direction often doesn't matter.

You can correctly predict that Apple will rise, Tesla will fall, or Microsoft will stay flat, and still lose money on every trade. This frustrates thousands of smart people every week, and it's completely avoidable once you understand what you're actually doing wrong.

The mistake isn't your market analysis. It's treating options like lottery tickets instead of managing them like a business.

Let me show you what this means in practice, and more importantly, how to fix it.

Why the "Cheap Option" Trap Is So Dangerous

Imagine you're shopping for insurance on your house. Two companies offer you quotes:

Company A: $50 per month, but only covers fires that start on Tuesdays Company B: $200 per month, covers all fires any day of the week

Company A looks cheaper, but is it better? Of course not. The low price reflects how rarely it actually pays out.

Options work exactly the same way.

When you see a $0.30 option, your brain thinks "cheap and safe." But that $0.30 price means the market believes this option has maybe a 5-10% chance of making money. You're not getting a bargain, you're buying something that probably won't work.

Professional traders look at that same $0.30 option and think: "Low price = low probability = probably a bad bet."

What Most People Do (And Why It Fails)

Here's the typical path for new options traders:

1. You think a stock will move (let's say Apple will go up)

2. You find the cheapest call option available

3. You buy it because "it's only $50"

4. The stock moves your direction

5. You still lose money because time ran out, or the option was too far from the actual stock price

You were right about the direction but wrong about the approach.

Here's what happened: That cheap option needed a massive, fast move to overcome three forces working against you:

• Time decay: Every day that passes, your option loses value

• Distance from reality: The option is so far out-of-the-money it needs a miracle to pay off

• Wide spreads: The difference between buying and selling prices eats into any profits

This is like buying that Tuesday-only fire insurance and then being shocked when your Wednesday fire isn't covered.

The Better Way: How Professionals Think About Options

Professional traders don't ask "Which option should I buy?" They ask completely different questions:

Question 1: "How much money can I afford to lose on this trade?" Not "how much can I make", how much can I lose. This determines everything else.

Question 2: "What's my actual probability of success?" Not "what do I think will happen", what does the math say about my odds?

Question 3: "Am I getting paid fairly for my risk?" Not "is this cheap", is the risk-reward balanced?

Question 4: "Can I get in and out easily?" Not "what's the biggest opportunity", what trades easily without huge costs?

Notice how different these questions are? This shift in thinking is more important than any strategy you'll ever learn.

A Simple Framework Anyone Can Follow

Let me break down a practical approach that mirrors how professionals actually trade. You don't need to use all of this immediately, but understanding it helps you see what you're missing.

Step 1: Decide How Much You Can Lose (Before Anything Else)

Before you even look at stocks or strategies, figure out your risk budget:

Per trade: Risk no more than 0.5-2% of your total account

• $5,000 account = $25-100 per trade max

• $10,000 account = $50-200 per trade max

• $25,000 account = $125-500 per trade max

Across all trades: Keep total risk under 10% of your account

• If you have $10,000, don't have more than $1,000 at risk total across all open trades

Why this matters: If you risk $100 per trade and lose five times in a row (which happens to everyone), you're only down $500. You can keep trading, keep learning, and eventually find what works. If you risk $2,000 per trade and lose twice, you're down $4,000 and probably done psychologically.

Step 2: Check If Options Are Expensive or Cheap Right Now

This is called "Implied Volatility" (IV), and it's simpler than it sounds.

Think of IV like car insurance prices: Sometimes insurance costs more (after lots of accidents), sometimes it costs less (during safe periods). Options work the same way.

Your broker shows you "IV Rank" or "IV Percentile", just look at this number:

Above 50%: Options are expensive right now

• What this means for you: Consider selling options rather than buying them

• Why: You're collecting expensive premiums that will likely decrease in value

Below 30%: Options are cheap right now

• What this means for you: Consider buying options

• Why: You're paying low prices that could increase in value

Between 30-50%: Normal pricing

• What this means: Either approach can work; focus on your directional thesis

Real example: If IV Rank is 65%, options are more expensive than they've been 65% of the time this year. That's a good time to sell, not buy.

Step 3: Use "Expected Move" to Pick Your Strike Prices

Every broker platform calculates something called "Expected Move", it's the market's best guess at where the stock will trade by expiration.

Here's how to use it:

If Apple is at $180 and the expected move is $8 over the next 30 days, the market thinks Apple will be between $172-$188.

If you're selling options (collecting money): Sell strikes outside this range. For Apple, maybe sell puts at $170 or calls at $190.

• Why: Higher probability the option expires worthless and you keep the money

If you're buying options (spending money): Buy strikes inside this range. For Apple, maybe buy calls from $180-$185.

• Why: Higher probability the stock reaches your strike price

This isn't a crystal ball, it's just using math instead of guessing.

Step 4: Stick to Stocks Where Options Trade Easily

Some stocks have options that are easy to buy and sell. Others have options with huge gaps between buying and selling prices. This gap is called the "bid-ask spread," and it's a hidden cost.

Simple rule: Only trade options on these types of stocks:

• Major indices (SPY, QQQ, IWM)

• Big tech companies (Apple, Microsoft, Amazon, Google, Tesla)

• Major ETFs (XLF for financials, XLE for energy)

Check these signs of good liquidity:

• Bid-ask spread under $0.10

• "Open Interest" in the thousands

• Options volume in the hundreds or thousands daily

Real example:

• Good: Apple $180 call showing Bid $4.90, Ask $5.00 (10-cent spread)

• Bad: Small company $50 call showing Bid $1.20, Ask $2.00 (80-cent spread)

That 80-cent spread means you lose $80 immediately just by entering and exiting the trade.

Step 5: Give Yourself Enough Time

Here's a simple truth: The more time you buy, the more forgiving your trade is.

For most strategies: Look at options 30-60 days out

• Enough time for your thesis to work

• Not so much time that you're paying for months you don't need

• Sweet spot for both buying and selling strategies

Avoid weekly options when you're learning

• They move too fast

• Mistakes compound quickly

• Time decay hits hard in the final week

Think of it like this: A weekly option is like sprinting, one stumble and you're out. A 45-day option is like a long jog, you have room to adjust pace if something goes wrong.

Step 6: Decide Your Exits Before You Enter

This is the most important step that most people skip.

Before you click "buy" or "sell," write down:

For trades where you're collecting money (credit spreads, covered calls):

• "I'll close this trade when I've made 40% of the maximum profit"

• "I'll exit this trade if it loses more than 2× what I collected"

For trades where you're spending money (debit spreads, long calls/puts):

• "I'll close this trade when I've made 50-75% profit"

• "I'll exit this trade if it drops 50% or my thesis is clearly wrong"

Real example: You sell a credit spread and collect $1.00 per contract ($100 total).

• Exit to take profit: When it's worth $0.60 or less (you made $40)

• Exit to cut losses: When it's worth $2.00 or more (you're down $100)

Write these down before you trade. When the moment comes, you just follow your plan, no emotion, no hoping, no guessing.

Step 7: Learn From Many Trades, Not One

Professional traders know something important: Any single trade can succeed or fail for random reasons. Your edge only shows up over many trades.

Track these simple numbers:

• How many trades did you make?

• How many won versus lost?

• What was your average win in dollars?

• What was your average loss in dollars?

After 20-30 trades, patterns emerge:

• If you win 60% of the time but your losses are bigger than wins, you need better exits

• If you win 40% of the time but winners are much bigger than losers, you're on the right track

• If you're losing more than you're winning overall, something needs to change

Don't judge yourself on five trades. That's not enough data. Give yourself at least 30 trades to see what's really working.

Two Real Examples: Bad vs. Good

Example 1: The Common Mistake

Situation: Tech company at $150, earnings coming up next week

What most beginners do:

• Buy 5 calls at the $160 strike

• Pay $0.20 each ($100 total)

• Think: "If it hits $165, I'll make a fortune!"

What actually happens: The stock goes to $155 (you were right about direction!), but:

• Your $160 calls expire worthless

• You lose the entire $100

• Time ran out before the stock got high enough

Why it failed: The option needed a 6.7% move in one week, and even a 3.3% move in your favor wasn't enough to overcome the distance and time decay.

Example 2: A Better Approach

Situation: Same stock at $150, but using a systematic framework

What a more experienced trader does:

• Checks IV Rank: It's at 40% (moderately elevated)

• Decides to sell a bull put spread instead of buying

• Sells the $145 put, buys the $140 put

• Collects $1.20 per contract ($120)

• Gives themselves 45 days instead of one week

Exit plan written before trading:

• Close at $0.60 value (made $60 profit)

• Exit if it reaches $2.40 value (losing $120)

What happens: The stock stays above $145 for 30 days. The trader closes the position for a $60 profit, having captured 50% of the maximum potential without waiting for expiration.

Why it worked:

• Probability was in their favor (80% chance of success)

• Time was working for them, not against them

• Even if wrong, the loss was defined and manageable

• Clear exits removed emotion from decisions

Understanding Four Important Numbers

You'll hear these terms a lot. Here's what they mean in plain English:

Delta (Your Probability)

What it is: A number between 0 and 100 that estimates your probability of profit

How to use it:

• If you sell a put with 20 delta, you have roughly an 80% chance of keeping the money

• If you buy a call with 50 delta, you have roughly a 50% chance of profit

• Higher delta = higher probability (but usually costs more)

IV Rank (Is This Expensive?)

What it is: Tells you if options are priced high or low compared to the past year

How to use it:

• Above 50 = Options are expensive (consider selling)

• Below 30 = Options are cheap (consider buying)

• Between 30-50 = Normal pricing (either approach works)

Expected Move (The Market's Best Guess)

What it is: Where the market thinks the stock will trade by expiration

How to use it:

• If selling options, pick strikes outside this range

• If buying options, pick strikes inside this range

• Don't fight the math, respect the probabilities

Bid-Ask Spread (Your Transaction Cost)

What it is: The gap between what you pay and what you receive

How to use it:

• Under $0.10 = Good, trade it

• $0.10-$0.30 = Acceptable for longer-term trades

• Over $0.30 = Probably too expensive, find something else

Your First Month: A Practical Plan

Week 1: Watch and Learn

Don't trade yet. Just observe:

• Pick 5 stocks (Apple, Microsoft, SPY, QQQ, and one you like)

• Each day, look at IV Rank and Expected Move

• Identify one trade you would make if you were trading

• Write down what you'd do and why

• Track what happens by the end of the week

Week 2: Make Your First Trade

Now put real money in, but keep it tiny:

• Risk only 0.5% of your account (if you have $5,000, risk $25 max)

• Pick one defined-risk trade (like a spread where you know your maximum loss)

• Write down your exits before you trade

• Follow through mechanically, no changing your mind

Week 3: Add One More Strategy

Keep your first approach going:

• Add a second trade in a different stock

• Use the same small position size

• Keep documenting everything

• Don't increase size just because you're winning

Week 4: Review Everything

Look at what happened:

• Did you follow your exits?

• What worked and what didn't?

• How did you feel during the trades?

• What would you change?

Don't judge yourself on profit yet. Judge yourself on whether you followed your process. Profit comes later, after the process is solid.

Common Questions (And Honest Answers)

"If I only risk 1%, won't my profits be tiny?" Yes, at first. But tiny consistent profits compound over time, while one big loss can wipe out months of gains. Professional traders get wealthy through hundreds of small wins, not a few big gambles.

"What about those $0.20 options that could turn into $2.00?" Yes, it happens. About 5-10% of the time. The other 90-95% of the time, you lose your money. Over many trades, the math doesn't work. There are better ways to use leverage.

"Don't spreads limit my upside unnecessarily?" Spreads do cap your profit, but they also cap your loss. When you're learning, surviving is more important than maximizing. Once you've proven you can manage risk, you can take on more aggressive strategies.

A Simple Checklist You Can Print

Before every trade, check these:

Risk:

• My maximum loss is 0.5-1% of my account

• I can afford to lose this amount without stress

• My total risk across all trades is under 10%

Probability:

• I checked IV Rank and my strategy makes sense for it

• I used Expected Move to pick my strikes

• My delta suggests reasonable probability

Liquidity:

• The bid-ask spread is under $0.10

• Open interest is in the thousands

• This is a liquid stock (not something obscure)

Plan:

• I wrote down my profit target

• I wrote down my loss limit

• I know when and why I'll exit

If you can't check all these boxes, don't make the trade.

The Bottom Line

Options trading isn't about predicting the future, it's about managing probability, time, and risk through a repeatable process.

The traders who succeed don't have special information or better predictions. They have better processes that they follow consistently, trade after trade, month after month.

Start with this framework:

• Risk small amounts (0.5-1% per trade)

• Check if options are expensive or cheap (IV Rank)

• Use Expected Move to pick strikes

• Trade only liquid stocks

• Give yourself 30-60 days

• Write down your exits before you trade

• Learn from many trades, not one

Master these basics before getting fancy. The foundation matters more than advanced strategies.

Build your process, follow it mechanically, track your results, and adjust based on what the data tells you, not on how you feel or what you hope.

That's how professionals trade. That's how wealth compounds. That's how you avoid being another statistic of someone who was right about the market but still lost money.

Quick Start Checklist

Before your first trade:

• Decide your maximum loss per trade (0.5-1% of account)

• Learn how to find IV Rank on your platform

• Learn how to find Expected Move on your platform

• Identify 5 liquid stocks to focus on

For every trade:

• Maximum loss is within your risk limit

• Strike selection based on Expected Move

• Exits written down before entry

• Only trading liquid options

Start here. Build from this foundation. Everything else comes after you master these basics.

Probabilities over predictions,

Andy Crowder

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