The Crucial Mistake Every Beginner Options Trader Must Avoid

Trading options can be a lucrative endeavor if approached with discipline and knowledge. However, there is one critical mistake that can derail even the most promising traders. In this article, we’ll explore this mistake, why it happens, and how you can avoid it to ensure a successful trading career.

Understanding Options Trading Success

Professional options traders rely on strategies with a long-term edge, executing them consistently. While individual trades may win or lose, disciplined repetition usually leads to profitability. One such strategy is the 10 Delta Iron Condor, a popular approach in options trading.

How the 10 Delta Iron Condor Works

Setting It Up: The iron condor involves selling two short options close to the market price and buying two protective options farther out. For example:

1. • Sell two call options above the market price (Delta ~10)
2. • Sell two put options below the market price (Delta ~10)
3. • Buy two call options farther above the market price for protection
4. • Buy two put options farther below the market price for protection

Example Trade:

On March 31, 2023, with the S&P 500 index at 4109, a trader might set up:

1. • Sell 4200 calls and 4000 puts (Delta ~10)
2. • Buy 4250 calls and 3950 puts for protection

Because the sold options have a low probability (~10%) of expiring in the money, this setup typically wins about 80% of the time.

The Trap of Overconfidence

When executed consistently, the iron condor strategy can deliver steady profits. For example, over 10 weeks, a trader might earn $9,718 by trading modestly-sized positions, averaging $971 per week. Seeing this winning streak, many novice traders become overconfident. They assume the strategy is foolproof and increase their position size dramatically.

The Cost of Oversizing

Let’s illustrate the danger of scaling up recklessly:

1. The Fatal Decision: After 10 consecutive wins, a trader increases their position size tenfold, moving from a two-lot trade to a 20-lot trade. They collect a premium of $9,200, requiring $90,800 in capital

2. The Disaster: Unfortunately, the market rallied unexpectedly. The index closes above the sold calls, resulting in a massive loss of $29,980. This single loss erases the profits from the previous 10 trades and plunges the trader deep into the red

3. Psychological Impact: Such a catastrophic loss often breaks a trader’s confidence. They lose faith in their strategy, abandon trading, and might even quit the profession entirely

Why Scaling Gradually Is Crucial

To succeed as an options trader, you must build risk tolerance like a muscle. Gradually increase your position size only after you’ve tested your resilience to losses at each level.

1. Increase Slowly: Start with modest positions. For example, after trading two lots for a quarter, increase to three or four lots

2. Test Your Psychology: Stay at each size until you’ve experienced at least one loss. This ensures that you’re mentally prepared for the larger losses that come with bigger positions

3. Avoid Increasing After Wins: Counterintuitively, it’s better to size up after a loss rather than after a winning streak. This prevents overconfidence from leading to reckless decision-making

A Smarter Path to Growth

Had the trader in our example stuck to their original two-lot size, the loss from the unfavorable trade would have been manageable at $2,998. Over the same period, they would have ended with a positive return of $4,168 — a 44% gain on the required capital. Gradual growth is the key to sustainable success.

Final Thoughts

The most dangerous mistake in options trading is oversizing your positions too quickly. No matter how strong your strategy is, a single oversized loss can wipe out months of profits and your confidence. To avoid this, follow these best practices:

1. • Build position size gradually
2. • Test your resilience to losses at each level
3. • Never increase your size during a winning streak