Why Do Option Traders Lose Money?

Why Do Option Traders Lose Money?

Why option traders lose money.

I believe that the primary reason why option traders lose money is that they trade too large and they also don't take into account how volatility expansion affects their account.

In March 2020 the market fell 36% in 33 days and then had a V-shaped bottom - hitting a new high just a few months later. Despite hitting a new high, a lot of people lost money because of volatility expansion and some were forced to close out their positions at the most inopportune time.

Despite winning over 90% of their trades, many traders get lulled into a false sense of security and then when the market pulls back and the VIX spikes up from 15 to 35 to 40, traders experience sequence risk (where they have heavily correlated positions in their account which all show large losses during market crashes).

During these times, traders can run out of buying power and their online brokerage can force them to close positions.

You never want to be forced out of your positions.

One important way to prevent this from happening is to trade vertical credit spreads (defined risk), so that volatility expansion is neutralized (from purchasing the long put option).

Additionally, you can buy long-dated put options during periods of low volatility.

Become a Successful & Profitable Trader

Follow My Trades with Live Trade Alerts

By far the biggest reason why options traders will lose money is that they trade too large, trade naked options and get caught in a large market pullback (with an accompanying volatility expansion).

Traders often become too complacent and overconfident. Their trades won't get challenged and they feel that they're leaving money on the table.

So they trade larger and end up losing money during a large pullback or a large volatility expansion event.

One of the best things that you can do is to either trade spreads or, if you trade naked, then you're selling puts on quality stocks that you actually want to own at the strike price.

That way, if you get assigned that position then you're happy with owning the shares and want to participate in the upside of the stock.

Selling premium can make you rich, but only if you do it the right way.

Learn the most successful options trading strategies.

David Jaffee with beststockstrategy.com, let me know your thoughts below on why you think some option traders, or option sellers, end up losing money.

Become a Successful & Profitable Trader with our Trade Alerts Special Offer

Take the BEST options trading education course and learn how to be profitable in all market environments

Discover the Best Trading Strategy for Consistent Profits

  • Learn how to earn consistent profits in the stock market while also reducing risk.
  • Step-by-step education course teaches you everything you need and caters to ALL traders (absolute beginners through advanced traders)
  • Responsive Email Support

Conclusion (Why Do Options Traders Lose Money?)

It almost always comes down to size and trading naked options.

Option traders trade too large and end up running out of buying power during a large pullback.

To avoid this from happening, options traders can trade vertical credit spreads and buy options during periods of low volatility.

Frequently Asked Questions (FAQs)

Why do option traders lose money?

Option traders lose money because they usually trade too large or engage in low probability trades.

Option sellers sometimes trade naked options and these positions get challenged during a market crash.

Option buyers lose money because the expected profit of each trade is negative.

When trading, it's always best to hedge your positions, even if that means that you'll sacrifice a few percentage points of profit in a bull market. By hedging, you can outperform by ~30% during a bear market.

How can option traders make money?

Sell OTM options on stocks that you want to own and have enough buying power to take ownerships of the underlying security if necessary.

When trading, use vertical credit spreads.

Buy options during periods of low volatility to protect your portfolio.

Who provides the best options trading education?

David Jaffee from BestStockStrategy provides the best options trading materials.

What is sequence risk when trading options?

Sequence risk, when trading options, refers to having heavily correlated assets in your portfolio. During a market crash, many of these positions show a loss which has a compounding affect on your portfolio and can cause options traders to suffer large losses.

About the Author David Jaffee

I (David Jaffee) help people become consistently profitable traders while minimizing risk. I graduated from an Ivy League University and worked at some of Wall Street's most successful investment banks. Subscribe to my YouTube channel for valuable videos - BestStockStrategy YouTube Channel‚Äč. Finally, if you're looking to Land a Finance Job, then I've put together the best step-by-step course at LandaFinanceJob.com. My personal website is DavidJaffee.com.

follow me on:

Leave a Comment: