Mistake 1, critical severity
Sizing Based on Option Cost Instead of Notional Value
Buying $5,000 worth of options thinking 'I can only lose $5,000.' But those options control $100,000 in stock. Your portfolio now has 10x leverage without you realizing it.
The fix
Size positions based on notional exposure (delta x 100 x stock price x contracts). Limit notional exposure to 20-30% of account. A $500 option controlling $20,000 in stock should be sized as a $20,000 position.
What it looks like. $50,000 account. Buy 10 AAPL call contracts for $5,000 total. Notional exposure: 10 x 100 x $185 = $185,000. That is 3.7x leverage. AAPL drops 5%: lose $2,500 (5% of account). Manageable. But had you bought 50 contracts for $25,000 (still 'only half your account'), notional is $925,000. AAPL drops 5%: lose $12,500 (25% of account).
Mistake 2, critical severity
Putting Too Much Account in One Trade
Putting 20-50% of account into a single options trade because 'it is a sure thing.' No trade is certain. One bad outcome devastates the account.
The fix
Maximum 2-5% of account risk per trade. For long options, this means the premium should be 2-5% of your total account. For credit strategies, the maximum loss should be 2-5% of your account.
What it looks like. Trader puts 40% of $25,000 account ($10,000) into TSLA weekly calls. TSLA drops 8% on Monday. Options lose 70%. $7,000 loss in one day. Account down 28%. Takes months to recover.
Mistake 3, high severity
Using Weekly Options for Full-Size Positions
Buying weekly options at the same dollar amount as monthlies. Weeklies have extreme gamma and can go to zero in hours. The leverage effect is amplified.
The fix
Reduce position size by 50-75% for weekly options compared to monthly positions. The faster time decay and higher gamma mean smaller positions are appropriate.
What it looks like. Normally buy 5 contracts of 45 DTE options. Apply same $2,500 budget to weekly 3 DTE options. Get 25 contracts (cheaper per contract). Stock moves 2% wrong way. 45 DTE options lose 15%. Weekly options lose 60%. Same budget, 4x the loss.
Mistake 4, high severity
Averaging Down on Losing Options Positions
Buying more options as your position loses money, hoping for a reversal. Unlike stocks, options have an expiration date. Time is not on your side.
The fix
Never average down on options. If your thesis is wrong, cut the loss. If you still believe in the thesis, close the current position and open a new one at a later date with more time value.
What it looks like. Buy MSFT calls for $4.00. MSFT drops, calls now $2.00. 'Double down to lower cost basis.' Buy more at $2.00. MSFT drops further, all options expire worthless. Lost $6,000 instead of $4,000.
Mistake 5, medium severity
Not Accounting for Correlation in Multiple Positions
Having 5 bullish call positions thinking you are diversified. But all 5 are tech stocks that correlate 0.80+. A sector selloff hits all positions simultaneously.
The fix
Track sector and market correlation of all positions. Limit correlated exposure to 10-15% of account. If you have 5 tech calls, treat it as one large tech bet, not 5 independent trades.
What it looks like. Long calls on AAPL, NVDA, MSFT, GOOGL, META. 'Diversified across 5 stocks.' Nasdaq drops 5%. All 5 positions lose 30-50%. Total loss: 25% of account. Felt diversified but was concentrated in one sector.
