7 Mistakes Draining Your Account
You’ve probably heard the stat before. Roughly 90% of new options traders don’t make it long-term in the options market. It stings, but it’s not random bad luck. Most traders bleed money because of avoidable mistakes they don’t even realize they’re making.
This guide breaks down the seven critical errors wiping out trading accounts and, more importantly, how to sidestep them. Here’s what we’ll cover:
- Treating options like stocks (they’re not)
- Ignoring time decay and letting theta eat your profits
- Overleveraging and blowing up your account
- Chasing cheap out-of-the-money options
- Trading without a defined strategy or exit plan
- Letting emotions hijack your decisions
- Misunderstanding implied volatility and IV crush
Ready to stop the bleeding and trade smarter? Let’s get into it.
Mistake #1: Treating Options Like Stocks
Here’s the hard truth. Options, contrary to stocks, are a depreciating asset with an expiration date. You can’t hold an option forever like you could do with stock in a company.
Many new traders buy options the same way they buy shares: pick a direction, enter a position, and wait. But waiting is exactly what kills options trades.
Why This Mindset Fails
Stocks don’t have a countdown clock. Options do.
The basic idea is that because there’s less time for a security to move one way or the other, options become less valuable the closer they get to their expiration dates. This isn’t linear, either. The rate of options decay speeds up as an option gets closer to expiration.
| Stocks | Options |
| No expiration | Fixed expiration date |
| Hold indefinitely | Value erodes daily |
| Only need direction | Need direction and timing |
The Fix
Stop thinking “buy and hold.” With options, you need:
- A clear timeframe for your trade thesis to play out
- An understanding that every day you hold, you’re paying a hidden cost
- Exit strategies before entering the trade
Even if the underlying stock moves in the right direction, it may not move enough to offset time decay. Options trading is all about the magnitude of the move. Direction alone won’t save you.
Stock options have a time decay that can quickly erode in value if you don’t choose a long enough option expiration date. See chart below:
Mistake #2: Ignoring Time Decay
Theta (θ), also known as time decay, is the one-day rate of decline of an option’s extrinsic or time value. Think of it as a silent tax you pay every single day you hold a position.
How Theta Works Against You
Long options lose value over time, and as they near their expiration date, all else equal, the rate of theta decay accelerates the closer you get to contract expiration.
ATM options have the highest rate of decay. As options move either OTM or ITM, the rate of decay drops and approaches zero.
| Days to Expiration | Decay Speed |
| 60+ days | Slow, gradual |
| 30-45 days | Accelerating |
| Under 14 days | Aggressive |
How to Fight Back
- Choose longer expirations when buying options to give yourself breathing room
- If you’re buying options, your best bet is to avoid holding positions in the red zone, where time decay is most aggressive
- Consider selling options (credit spreads) to flip theta in your favor
Note how quickly time premium begins to decay around 30 days prior to expiration. If you’re buying, aim to exit well before that 30-day cliff.
Mistake #3: Overleveraging Your Account
Options are inherently leveraged. Derivative instruments like options allow traders to control large positions with a smaller capital outlay. That’s the appeal. It’s also the trap.
Why Traders Blow Up
Overleveraging happens when a trader takes on positions that are too large in relation to their account size. One bad trade, and your account doesn’t just take a hit. It gets wiped.
Leveraged trading is riskier because it enables you as a trader to open bigger positions than your total account size. This expanded exposure is the core idea behind how leverage is used in trading, and it is the reason losses accelerate quickly when markets move against you.
Warning Signs You’re Overleveraged
- Large drawdowns (losing more than 20% of your account balance) suggest that your positions are too large
- If you constantly worry about your trades and are unable to sleep due to market movements, it could be a sign that you are overleveraged
- Frequent margin calls
The Fix
Never risk more than 1-3% of your capital on a single trade. Use stop-loss orders to cap potential losses.
Before entering any trade, calculate your maximum loss. If that number makes you uncomfortable, size down.
Mistake #4: Chasing Cheap OTM Options
Cheap options feel like lottery tickets. A few bucks could turn into hundreds. The math, however, tells a different story.
The Lottery Ticket Trap
Several studies show that individuals tend to buy “out of the money” options. On average, those investors lost 91%, even with their big gains included.
Why? OTM options are often called “lottery tickets,” cheap, exciting, and usually worthless at expiry.
| Option Type | Cost | Probability of Profit |
| Deep OTM | Low | Very low |
| ATM | Moderate | ~50% |
| ITM | Higher | Higher |
Why OTM Options Fail
An OTM option has no intrinsic value and a low delta. That means the market believes the probability of finishing in-the-money is small.
Even if the stock moves in your direction, it often isn’t enough, or doesn’t happen fast enough, to overcome decay.
The Smarter Play
- Focus on ATM or slightly ITM options for higher probability trades
- Stop buying options because they are cheap. Start buying options because the moneyness makes sense.
Most OTM options expire worthless. That’s not bad luck. That’s math.
Mistake #5: Trading Without a Plan
No entry criteria. No exit strategy. No position sizing rules. Just vibes.
This is how accounts die quietly.
Why Plans Matter
A trading plan is designed to pre-determine an exit strategy for any trade that you initiate. That’s pre-determine, as in, before you actually enter the trade.
Without a solid exit strategy, traders expose themselves to the risk of significant losses. This can lead to a large depletion of capital or even the complete loss of their trading account.
What Your Plan Should Include
- Entry criteria: Why are you getting in?
- Profit target: When do you take the win?
- Stop-loss level: When do you cut the loss?
- Position size: How much are you risking?
Some traders will exit options trades at a 50% loss or a 100% gain. So that’s one of their guidelines they’ve established in their plan.
Three Exit Methods
- Time-based: Exit after a set period regardless of P/L
- Target-based: Exit when profit or loss hits a predetermined threshold
- Technical: Exit when price action signals a reversal
Options trading involves far too many variables beyond your control. You must have a trading exit strategy planned out before you enter a trade.
Mistake #6: Letting Emotions Drive Decisions
Fear makes you sell winners too early. Greed makes you hold losers too long. Both will drain your account.
The Emotional Cycle
Fear will tell you to exit a trade too soon, and greed will convince you to hold on longer than you should.
Here’s how it typically plays out:
- Optimism → You enter the trade
- Greed → Position is winning, you ignore your exit plan
- Fear → Market reverses, you freeze
- Panic → You sell at the worst possible moment
Greed leads traders to overtrade as they chase bigger wins, over-leverage their account risking way too much capital on single trades, and fail to take profits off the table quick enough.
Common Emotional Traps
- Revenge trading: Doubling down after a loss to “make it back”
- FOMO: Jumping into trades without analysis because others are trading it
- Loss aversion bias: Selling winners quickly but sitting on losers even when indicators turn bearish
How to Stay Rational
- Having a solid trading plan that comes with official procedures and best practices can give traders confidence in the process and strategy they have built.
- Keep a trading journal to track emotional patterns
- Step away after big wins or losses
The best way to manage emotions is to create a trading journal. Trading journals assist traders in recording their trades and make note of what is working and rectifying strategies that aren’t.
Mistake #7: Misunderstanding IV Crush
You predicted the earnings move perfectly. The stock jumped 5%. And you still lost money.
Welcome to IV crush.
What Is IV Crush?
IV crush is a trading term meant to describe a situation where implied volatility declines rapidly. This often occurs after a significant market event, like a corporate earnings report or a product release, when market uncertainty sharply decreases.
After the earnings announcement or news is released, implied volatility tends to drop quickly and significantly as the unknown becomes known, and the stock price reacts to the information.
Why It Wrecks Traders
Implied volatility rises before earnings and makes all option prices more expensive. Once the event passes, IV collapses, and so does your option’s premium.
Even if the stock does increase slightly after the announcement, but implied volatility drops sharply, the option’s premium could fall, resulting in a potential net loss, even though the trader was correct on the direction.
When IV Crush Happens
- Earnings announcements
- FDA approvals (biotech)
- Fed rate decisions
- Product launches
How to Avoid Getting Crushed
- The surest way to avoid implied volatility crush: Option traders should avoid buying long options directly before earnings.
- Traders can utilize credit spreads (sell out-of-the-money verticals that are already swollen in value) in order to take a volatility-negative approach.
- Compare the implied move to historical average moves before trading
It does not matter whether an earnings report was positively or negatively interpreted by the market. What matters is that the market received a clear message that reduces uncertainty, leading to an IV crush.
Stop the Bleeding and Trade Smarter
The 90% statistic isn’t a curse. It’s a consequence of avoidable mistakes repeated by traders who never stopped to examine why they were losing. Now you know the seven account-killers and, more importantly, how to sidestep them.
Key takeaways:
- Options are depreciating assets with expiration dates, not stocks you can hold forever
- Theta decay accelerates aggressively in the final 30 days before expiration
- Never risk more than 1-3% of your capital on a single trade
- Cheap OTM options are lottery tickets with a 91% average loss rate
- Every trade needs a predefined entry, exit, and position size before you click buy
- Fear and greed hijack your decisions; a trading journal keeps you accountable
- IV crush can turn a winning directional bet into a losing trade overnight
Knowledge alone won’t make you profitable. Consistent application will. Review these mistakes regularly, build your trading plan around avoiding them, and treat every trade as a lesson. The traders who make it into that top 10% aren’t geniuses. They’re disciplined, patient, and relentlessly focused on risk management. That can be you.