Why 85% of New Options Traders Lose Money in Year One — And How the 15 % Win
The house always wins... unless you become the house.
85% of retail options traders get annihilated in their first year.
The average amateur loses 9-10% of their trade value just to bid-ask spreads and poor timing.
Before the stock even moves.
Yet the same MIT study showed that institutional traders using identical options strategies were consistently profitable.
What's the difference?
Strategy. Position sizing. Time horizon.
Everything we're about to discuss.
Mistake #1: Trading Without Understanding the Machine
The Failure: Most dive into options because they hear about the "leverage" and "income potential." They buy calls hoping to hit home runs; or they sell puts without understanding assignment risk.
The Fix: Start with what you already own.
If you've got 500 shares of Johnson & Johnson (JNJ) sitting in your portfolio, selling covered calls against those shares is like collecting rent.
You're not speculating. You're monetizing volatility on property you already own.
Here's my trusted Covered Call Starter Recipe:
Own the stock first (quality dividend aristocrats only)
Sell calls 30-45 days out
Target strikes 10-15% above the current price
Aim for 2-4% monthly income
Simple. Boring. Profitable.
Mistake #2: No Battle Plan = Certain Death
The Failure: Walking into options without a plan is like performing surgery blindfolded. I watched a client turn a $300,000 portfolio into $180,000 in eight months. Why? He had zero exit rules. Every losing trade became a "long-term investment."
The Fix: The 5-4-1 Rule - is an absolute non-negotiable
5% maximum position size per individual trade
4% quarterly income target (16% annually)
1% maximum daily portfolio risk
AND Your Written Covenant (tape this to your monitor):
"I will never risk more than 5% on any single options trade"
"I will set profit targets AND stop losses before entering"
"I will review every trade weekly, emotions be damned"
Mistake #3: Treating Risk Like a Suggestion
The Failure: The most dangerous phrase in income investing: "But I can't lose more than the premium, right?"
Dead wrong.
OptionSellers.com clients discovered this in 2018. Natural gas volatility turned their "limited risk" trades into unlimited nightmare. Some investors owed money on top of losing their entire investment.
The Fix: Never sell naked options. Ever.
Only sell puts on stocks you'd happily own at the strike price
Keep full cash to cover assignment
Treat assignment as a discounted purchase, not a punishment
Target strikes 10-20% below current market price
Example: Realty Income (O) trades at $50. I'll sell the $45 puts for $1.50 premium. If assigned, I own a dividend aristocrat at an effective cost of $43.50.
If not assigned, I keep the premium and do it again.
Win-win. No drama.
Mistake #4: Leverage
The Failure: Options give you massive leverage with tiny up-front costs. People see they can control 500 shares for $300 instead of $25,000. Then they go berserk.
Numerous times I watched amateur traders lose 60-80% of their accounts in three weeks, because they'd bought 10x more contracts than they should have.
The Fix: Think in stock equivalent, not contract quantity.
Before buying any option, ask: "Would I buy this many shares of the underlying stock?"
If the answer is no, you're overleveraging.
1 options contract = 100 shares of exposure
If you wouldn't buy 500 shares, don't buy 5 contracts
Start with 1 contract until you can predict how it behaves
Scale up only after proving profitability
Mistake #5: Emotions
The Failure: Fear and greed turn disciplined investors into degenerate gamblers. They double down on losers.
They hold winners too long.
They make every decision at the worst possible moment.
Grown adults—successful professionals—throw decades of investing discipline out the window. The moment an options trade goes south, they panic. They'll sell quality dividend stocks to "fund the comeback trade."
Absolute insanity.
The Fix: Systematic execution beats emotional brilliance every time.
Set profit targets and stop losses before entering the trade
Use limit orders exclusively (never market orders)
Review positions weekly, not daily
Walk away from the screen after placing trades
Personal note: I check my options positions exactly once per week. Sunday evening with a cup of coffee. That's it.
The constant monitoring that addicts most traders only breeds bad decisions.
Mistake #6: Overtrading: Death by a Thousand Cuts
The Failure: New options traders think more trades = more profits. They chase every market wiggle.
During the 2021 GameStop madness, retail traders were paying 15-20% bid-ask spreads on weekly options. They'd need the stock to move 25% just to break even.
Genius.
The Fix: Quality over quantity. Always.
Maximum 4 new positions per month
Only trade highly liquid options (tight bid-ask spreads)
Focus on blue-chip dividend stocks you understand
Skip the daily drama, harvest the weekly premiums
Example: Instead of buying lottery tickets on meme stocks, I sell covered calls on my Microsoft position every month.
Boring? Yes.
Profitable? Also yes.
Mistake #7: Strategy Complexity
The Failure: Beginners think complicated strategies make them look sophisticated. They dive into iron condors, butterflies, and other exotic creatures. With zero understanding of the multiple ways these trades can explode.
The Fix: Master the basics before attempting gymnastics.
(in order of complexity):
Covered calls on stocks you own
Cash-secured puts on stocks you want to own
Protective puts for portfolio insurance
That's it for the first year
Only after 12 months of profitable basic trades should you even think about spreads or combinations.
Mistake #8: Ignoring Time
The Failure: Time decay (theta) is the Grim Reaper of options trading. Every day that passes, options lose value. Most beginners fight this force instead of harnessing it.
The Fix: Make time your employee, not your enemy.
Sell options with 30-45 days to expiration (capture fast decay)
Buy options with 90+ days to expiration (avoid fast decay)
Never hold long options past 30 days to expiration
Set calendar reminders for position reviews
Mistake #9: Volatility Ignorance = Profit Destruction
The Failure: Most beginners have never heard of implied volatility.
They buy options when everyone's panicking (volatility is high).
They sell when markets are calm (volatility is low).
Backwards. Every. Time.
During March 2020, VIX hit 82.
Amateur traders were paying 300% premiums for options protection after the crash.
Professional traders were selling those same options for massive profits.
The Fix: Buy low volatility, sell high volatility.
My Volatility Compass:
VIX below 20: Great time to buy protective puts (cheap insurance)
VIX 20-30: Neutral strategy execution
VIX above 30: Sell covered calls aggressively (fat premiums)
Current market insight: With VIX around 23, we're in the goldilocks zone for systematic options income strategies.
Mistake #10: Get-Rich-Quick Dreams = Get-Poor-Quick Reality
The Failure: People abandon decades of conservative investing for speculation. For every WallStreetBets millionaire you see posted, there are ten thousand silent losers. The math is brutal and unforgiving.
The Fix: Treat options as income enhancement, not account multiplication.
Target 15-20% annual returns through systematic options income
Expect winning percentage of 70-80% (not 100%)
Plan for occasional losses (they're tuition, not failure)
Focus on cash flow, not account balance appreciation
Most option traders will never implement this system.
I understand this.
They'll read this article and nod along, then continue hoping the market will somehow magically provide the income they need.
Hope is not a strategy.
The difference between the 85% who lose and the 15% who win isn't intelligence. It's discipline and treating options like a business, not a casino.
The casino is always open. But the house only wins if you let it.
Thank you for tuning in today and supporting my work!
Mike Thornton, Ph.D.
Having traded options successfully for well over a decade, I fully appreciate the wisdom shared in this post. Unfortunately, I also concur with the statement "Most option traders will never implement this system." Those who trade options profitably likely incorporate many of these principles into their strategy, while others will come to recognize their value through time and experience.