Most people enter options trading with big dreams—so why do nearly 90% end up losing money?
Our guide will review this phenomenon and bring some understanding of why so many traders fail to turn a profit when trading options for the first time. If you want to be a part of the 10% of new traders that have what it takes to succeed, we’d encourage you to get familiar with the concepts in this guide and ultimately avoid the fate of the 90%. Learn the top reasons why new options traders lose money on their investments and the steps you can take today to be one of the winners.
To give you a clearer idea of what we’ll be addressing in this guide: most reasons behind the failure rate for new traders are linked to disorganization and going into trading options without any kind of plan or goals in place. So many of the problems we’ll discuss in this guide can be alleviated by getting familiar with how options work and forming a clear plan to attain the profit you desire.
Are you curious why approximately 90% of options traders end up losing money? I’ve spent years exploring this question, and the truth is both simpler and more complex than most people realize.
Options trading has exploded in popularity, yet the failure rate remains shockingly high After analyzing countless trading patterns and speaking with both successful and unsuccessful traders, I’ve identified the key reasons why most options traders fail – and more importantly, how you can avoid their fate
The Brutal Truth About Options Trading
Let’s face it – options trading isn’t the get-rich-quick scheme many newcomers believe it to be. While options can provide tremendous leverage and profit potential they also come with significant risks that many traders simply aren’t prepared for.
As investment educator Larry McMillan notes in his book “Options as a Strategic Investment,” successful options trading isn’t about being right most of the time – it’s about being a good repair mechanic when things go wrong.
Why Do 90% of Options Traders Lose Money?
1. Lack of Proper Defense Strategies
The most successful options traders understand that defense is just as important as offense. Many beginners focus exclusively on finding the “perfect trade” without developing any contingency plans for when trades inevitably go wrong.
As stated in the Investopedia article, “Repair strategies are an integral part of any trading plan. It’s good to review a well-thought-out set of ‘what-if’ scenarios before putting any money at risk.”
2. Poor Risk Management
Many failed options traders share one common trait: they bet too much on individual trades. When you’re risking 20-30% of your account on a single position, even one bad trade can devastate your portfolio.
I’ve seen traders who were technically correct about market direction still lose everything because they didn’t properly manage position sizing and risk exposure.
3. Emotional Trading
Options trading requires discipline and emotional control. Unfortunately, many traders make decisions based on:
- Fear of missing out (FOMO)
- Panic selling during market downturns
- Revenge trading after losses
- Overconfidence after wins
These emotional responses lead to poor decision-making and ultimately, significant losses.
4. Lack of Knowledge and Experience
Options are complex financial instruments with many moving parts:
- Strike prices
- Expiration dates
- Implied volatility
- Greeks (Delta, Gamma, Theta, Vega)
- Different strategies for different market conditions
Many traders jump in without understanding these fundamentals, essentially gambling rather than trading strategically.
5. Overtrading
Commission costs add up quickly in options trading, especially when overtrading. Many unsuccessful traders constantly jump in and out of positions, trying to catch every market move instead of waiting for high-probability setups.
Additionally, overtrading exposes you to more risk and increases the chances of making emotional decisions.
Real-World Example: When a Trade Goes Wrong
Let’s look at a specific example from the Investopedia article to understand how repair strategies work:
Imagine you purchase an IBM July 95 call option for $3 when IBM is trading at $93.30. You’re bullish on the stock and expect it to break through resistance at $95.
Shortly after entering the position, IBM receives a downgrade and drops to $89.34. Your call option, which you bought for $300 ($3 × 100 shares), is now worth only $125 ($1.25 × 100 shares) – an unrealized loss of $175 per option.
Many traders would either:
- Panic sell and lock in the loss
- Hold stubbornly hoping for a reversal
- Average down by buying more calls (increasing risk)
But there are smarter repair strategies available.
Repair Strategy #1: Roll Down into a Bull Call Spread
One repair strategy is to roll down into a bull call spread:
- Sell two July 95 calls at $1.25 each = +$250
- Buy one July 90 call for $2.75 = -$275
This adjustment increases your total risk only slightly (from $300 to $325) but dramatically lowers your breakeven point from $98 to $93.25.
| Transactions | Debits/Credits | Cumulative Net Debits/Credits |
|---|---|---|
| Buy July 95 call | -$300 | -$300 |
| Sell 2 July 95 calls | +$250 | -$50 |
| Buy 1 July 90 call | -$275 | -$325 |
Repair Strategy #2: Roll into a Butterfly Spread
Another approach is to roll into a butterfly spread:
- Keep the original July 95 call
- Sell two July 90 calls at $4 each = +$800
- Buy one July 85 call for $7.30 = -$730
This actually reduces your risk to $230 (from the original $300) while creating a profit zone between $87.30 and $92.65.
| Transactions | Debits/Credits | Cumulative Net Debits/Credits |
|---|---|---|
| Buy July 95 Call | -$300 | -$300 |
| Sell 2 July 90 Calls | +$800 | +$500 |
| Buy 1 July 85 Call | -$730 | -$230 |
The profit/loss profile at expiration would look like this:
| IBM Price At Expiration | Profit/Loss |
|---|---|
| 85.00 | -$225 |
| 87.30 | Breakeven |
| 90.00 | +$264 |
| 92.65 | Breakeven |
| 95.00 | -$235 |
| 100.0 | -$235 |
The best approach might be to combine both repair strategies in a multi-lot approach, preserving multiple paths to profitability.
How to Succeed Where Others Fail
Now that we understand why most options traders lose money, let’s look at how you can avoid their fate:
1. Develop a Comprehensive Trading Plan
Before placing any trade, ask yourself:
- What’s my thesis for this trade?
- What’s my entry point?
- What’s my exit point (both profit target and stop loss)?
- What will I do if the trade moves against me?
- What repair strategies could I implement?
As the Investopedia article states, “Play good defense” is a good options-trading mantra.
2. Master Risk Management
Never risk more than 1-5% of your account on a single trade. This ensures that no single loss can significantly damage your portfolio.
Additionally, consider using defined-risk strategies like spreads rather than naked options positions when appropriate.
3. Control Your Emotions
Develop a trading journal to track not just your trades but also your emotional state when making decisions. This self-awareness will help you identify patterns and avoid emotional trading.
I’ve found that having clear rules for entries and exits helps remove emotion from the equation. When you have a plan, you’re less likely to make impulsive decisions.
4. Invest in Education
Before risking real money, take time to:
- Study options fundamentals
- Learn different strategies
- Paper trade to gain experience
- Understand the Greeks and how they affect option pricing
As the article notes, “There will always be losses in options trading, so each trade must be evaluated in light of changing market conditions, risk tolerance, and desired objectives.”
5. Trade Less, Trade Better
Focus on quality over quantity. Instead of placing dozens of trades hoping some will work out, wait for high-probability setups where the odds are in your favor.
I’ve noticed my own results improved dramatically when I reduced my trading frequency and increased my position sizing on my highest-conviction ideas.
What Is the Trick for Option Trading?
While there’s no magic formula for options trading success, the Investopedia article suggests that “the best way to trade options is to plan your trade and have exit and recovery strategies. Start with small trades and only trade money you can afford to lose or the returns you generate from trades.”
The real “trick” isn’t a secret strategy – it’s having the discipline to follow a well-designed trading plan while managing risk appropriately.
Recovering from Options Trading Losses
If you’ve already experienced losses in options trading, don’t despair. The Investopedia article notes that there are many ways to recover, but first you should:
- Stay calm and analyze what went wrong
- Learn from your mistakes
- Adjust your strategies or create new ones
This analytical approach will help you avoid repeating the same mistakes.
Options trading isn’t easy – that’s why most traders lose money. But by understanding the common pitfalls and implementing proper trading practices, you can position yourself in that successful 10% minority.
Remember that successful options trading requires:
- A solid trading plan with defensive strategies
- Proper risk management
- Emotional discipline
- Continuous education
- Patience and selectivity
As the Investopedia article concludes, “by properly managing the potential losers with smart repair strategies, you stand a better chance of winning at the options game in the long run.”
I’ve seen too many traders focus exclusively on finding winning trades rather than learning how to manage losing ones. The reality is that even the best traders are wrong frequently – what separates them is how they handle those inevitable losing positions.
Have you experienced losses in options trading? What strategies have you used to recover? I’d love to hear your experiences in the comments below!
Start Small and Paper Trade
If you’re new to trading options online, you should be taking advantage of demo accounts or paper trading simulators where you can use a virtual balance to practice online trading sessions. Why would you put your own money on the line when you aren’t yet familiar with how options trading works? Use these tools to your advantage to gain some experience and build up the confidence needed to take on a live trading environment.
Once you’ve trained up with a paper trading simulator, it’s time to enter the live trading setting, but you’ll still want to maneuver more defensively. What we mean by this is that, before putting a lot of your capital on the line, you can start with small position sizes in your trades to minimize potential losses.
Control Emotions and Stay Disciplined
Anyone who has had success in online trading will tell you that there’s no room for emotions. Not only do you have to use a trading strategy to succeed, but you must also use objectivity and logic in your decision-making—you cannot rely on your emotions to help you make the right moves to secure profit.
- Remove Emotion From the Equation—It’s always best to stick with your trading plan, but emotions have a way of creeping in when you least expect, especially when something unexpected happens during your trading session. A good way to keep overconfidence, frustration, or fear from taking a foothold in your decision-making is simply to take a break from trading to get perspective and reframe your thoughts back into a more logical and objective state of mind.
- Have Predetermined Exit Rules—Before you take on any trade, it’s key to establish how much you’re willing to take in profit and how much you’re willing to incur in losses. These predetermined exit rules take emotions out of the equation by establishing some boundaries for your trade. As long as you stick with these exit points and follow the course of your plan through, you’re trading based on research and numbers.
- Use Alerts, Not Gut Feelings—Instead of relying on gut reactions to make your decisions for you when notable market events occur, take a proactive approach by setting up alerts and notifications on your trading app of choice. These keep you in the loop on notable market events or when key price points have been reached for entering or exiting a trade. Once you’ve set up your trading parameters, use alerts to keep you accountable to the goals of your trading plan!
Why You Will (Probably) Lose Money Trading Options
FAQ
Why do most people fail at options trading?
Nine out of ten traders lose money in options trading due to factors like poor risk management, lack of understanding of complex strategies, time decay, and volatility.
Why do 90% of traders lose money?
The emotional aspect of trading often leads to irrational decisions like panic selling. When the market moves unfavourably, many traders, especially those who are inexperienced, tend to panic and exit their positions hastily. This panic selling often occurs at the worst possible time, leading to significant losses.
What is the 84% rule in trading?