MM34 - Why New Option Traders Lose Money

In the last few weeks I have had the opportunity to speak with a lot of new traders in the Options Goddess community, and I hear the same thing over and over again. They say, I am afraid to buy options because my friends all lost money buying them. And you know what? That is actually true. A lot of traders lose a ton of money buying options. So today I want to show you why that happens, what they are doing right, and what they are probably doing wrong.

There are two schools of thought for options traders. I have a very strong opinion on this. In the 28 years I have been doing this, I have learned a thing or two. If you have been through my Beginner's Guide or Course 101, you have heard me talk about the difference between buying and selling options. Today I want to put real numbers behind it so you can see exactly why new traders struggle.

Let me start with the buy side. I pulled up a Google chart. When we were down at the low at the end of March, that was what I call the cherry on top bullish “selling a put” setup. We had a confluence buy signal, a beautiful -2.6 mean reversion, and we sold off right into the 200 moving average and prior support. I was selling puts there, Buying LEAPS,  Buying modified synthetic longs and synthetic longs. That was the entry.

But now we are up here after a huge run. The stock has just ripped to the upside, straight up. Would I buy an option up here? No way. And this is where a new trader comes in and says, I cannot stand it anymore, I know it is going to keep going, and I am going to buy a call. They buy a short term call because it is cheaper. That is the common thing with new traders. It is not that they are bad. They are new. They see a cheap option and think, why would I not buy it?

So let me show you just how expensive that cheap option truly is and how hard it is to win.