We've had a wild start to our 2025 trading year. When the market gets volatile, sometimes it's okay to take a backseat in some trading and bust out the notebook and study a bit while we wait for volatility to cool back down.

This week, we wanted to help our traders understand the most common reasons option traders lose. We found a research article titled "Who Profits From Trading Options?" that gives us insight on why traders that incorporate more complex strategies such as volatility-trading, futures, and being delta neutral perform better than traders that simply buy calls and puts.

While the specific styles of complex trades can differ from one another, there were five common mistakes the researchers saw in the data on why the more-simple-retail-traders lose. In this blog, we'll be going over why it's more about what you don't do vs. what you do do.

1. Overconfidence

Retail traders often overestimate their market insight, leading to excessive trading activity driven by overconfidence. This optimism frequently results in poor returns as frequent trading, particularly in straightforward strategies like buying long calls or puts, increases transaction costs and exposes traders to unnecessary market risk. To mitigate these effects, traders should prioritize quality over quantity, objectively evaluate their strategies, and limit unnecessary trades. Using tools like stock and option-related tools can help track performance and identify areas for improvement, fostering more disciplined and effective trading practices.

2. The Disposition Effect

The disposition effect, common among retail investors, involves locking in small gains prematurely while holding onto losing positions in hopes of a rebound. This behavior undermines long-term profitability, as small gains fail to offset large losses, especially in leveraged products like options. To overcome this, traders should establish clear entry and exit rules and use automated stop-loss orders to minimize emotional decision-making.

3. The Lottery Effect

Retail traders often chase options with lottery-like payoffs, such as out-of-the-money (OTM) contracts, drawn by the allure of massive rewards despite their low probability of success. This behavior leads to consistent losses over time, as these inexpensive contracts rarely generate profits. To avoid this pitfall, traders should diversify their portfolios with strategies offering more predictable outcomes and carefully assess the odds before pursuing high-risk trades.

4. Trend-Chasing

While most retail investors avoid chasing market trends, some fall into the FOMO trap of buying during rallies or selling during declines. This reactive behavior, based on recent trends rather than analysis, often leads to losses when markets correct. To avoid this, traders should rely on research, follow predefined strategies, and avoid impulsive decisions driven by market movements. Having a set of predefined trading rules helps make the scary trading days less scary and the most exciting days awesome opportunities to responsibly scale into positions.

5. Self-Attribution Bias

Self-attribution bias leads retail traders to mistake luck for skill after a profitable streak, prompting increased trade volume or position size. This overconfidence can result in riskier decisions and significant losses when the market shifts. To avoid this, traders should remain grounded, evaluate performance over the long term, and prioritize consistent results over short-term gains. A trading journal does wonders for this as newer investors try to normalize and refine their trading strategies after a very volatile trading period.

And there you have it—five key reasons why traders lose in the options market, straight from the research and broken down just for you! The good news? Every single one of these mistakes can be addressed with a little self-awareness, education, and the right tools. Remember, no trader is perfect, but the best traders are those who constantly strive to learn, adapt, and refine their strategies.

Awareness is the first step toward improvement. By recognizing these common pitfalls and reflecting on your own habits, you’re already ahead of the curve. So, whether you’re taking a break during a volatile market or diving into your next big trade, keep these lessons in mind. The journey to becoming a smarter, more successful trader is all about progress, not perfection. You’ve got this!

Sources

Hu, J., Kirilova, A., Park, S. G., & Ryu, D. (2021, June 15). Who profits from trading options? Singapore Management University - Lee Kong Chian School of Business Research Paper. Retrieved January 6, 2025, from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3867129