News Snapshot

• S&P 500 Ends Five-Quarter Winning Streak

• Market Dips, Flips, and Lands in the Green

• April 2nd Tariffs: Markets Expect a Shake, Not a Quake

• Consumers are exhausted and frustrated with high prices

TL;DR

“Good-To-Know’s”

Theta is the cornerstone of my trading philosophy, as time can work in your favor when you structure your trades strategically. By making thoughtful and calculated trade decisions, you can harness the power of compounding to your advantage. Theta is nuanced and complex, as seen in its non-linear decay. As an option nears expiration, time decay accelerates, especially for options that are at or near the money.

Understanding theta helps you anticipate how much value an option will lose each day—like a theta of -0.05, which means the option loses about 5 cents per day, all else being equal. For option sellers, this time decay is a key part of the strategy, as it allows them to profit as the option loses value over time.

Relevant Quote(s) I Like

Thought Throttle

Many traders turn to options selling for consistent income, expecting a steady and controlled approach to the market. Yet, common mistakes quickly turn well-planned strategies into unanticipated losses. Whether it's misjudging risk, neglecting position management, or overlooking market conditions, common option-selling errors can undermine the very stability that options sellers seek.

While options selling offers advantages like time decay working in your favor, it also requires discipline and awareness of potential pitfalls. Selling premium without fully understanding assignment risk, margin requirements, or volatility shifts can lead to costly surprises. Even experienced traders can fall into these traps if they become complacent or overconfident in their approach.

The good news is that many of these mistakes are preventable with the right knowledge and strategy adjustments. By recognizing common missteps ahead of time, you can strengthen your risk management, improve trade selection, and ultimately increase your consistency as an options seller. Let’s deep dive into the key errors many new traders, and experienced traders for that matter, make—and how to avoid them.

Strategy Overcomplication and Hesitation

It’s tempting to wait for that “perfect” setup—a combination of high premiums, low volatility, and an ideal chart pattern. But this perfectionist approach can lead to missed opportunities as the market doesn’t always cooperate with your ideal scenario.

Overcomplicating strategies also contributes to this problem, where traders add too many legs or adjustments, thinking sophistication leads to higher profits. In reality, each added complexity can lead to confusion and costly mistakes, especially in a market that’s constantly evolving. Make sure that every amendment to your strategy is a ‘net good’ for your portfolio as a whole.

The Fix

Rather than waiting for the elusive perfect setup, focus on developing a repeatable strategy with defined rules for entries, exits, and adjustments. A simple and systematic approach allows you to take advantage of opportunities consistently, even if the setup isn’t “perfect.”

Keeping your strategy straightforward and adaptable to changing market conditions will help you stay on track without overcomplicating things or missing key moments for action.

Overleveraging & Improper Position Sizing

It’s easy to overextend when selling options—collecting premium and seeing steady returns can feel rewarding. However, selling too many contracts or taking on too much margin leaves you vulnerable to market swings. A few bad trades with oversized positions can wipe out months of slow and steady gains. Overleveraging might seem like a shortcut to quick profits, but it’s the financial equivalent of tempting fate to see if it can rain on your parade (Spoiler—it can).

Similarly, improper position sizing—whether too big or too small—can lead to trouble. A small position won’t generate meaningful returns, while a large one can cause significant damage if the trade goes wrong. Many traders mistakenly rely on gut feelings instead of a solid risk management plan, leading to emotional decisions that can undermine a carefully crafted strategy. Losses are more impactful than gains, so it takes a bigger gain to offset a loss.

The Fix

To avoid both overleveraging and improper position sizing, set strict limits on how much of your portfolio you’re willing to risk per trade—consider a fixed percentage (like 1-3%) and stick to it. Establish a "no-go" zone for margin, and think of your portfolio like a garden: steady nurturing is key, not reckless expansion.

Don’t let the urge to gamble take over—if you need to scratch that itch, plan a trip to Vegas instead of risking your portfolio. Ensure each trade fits within your risk management framework and always aim for consistency without jeopardizing your overall strategy.

Too-Passive Trading

Some options sellers take a passive approach, always holding until expiration. While this can work, it also exposes you to unnecessary risks. A profitable position can turn against you quickly, and waiting for every trade to expire maximizes exposure to market swings. Just like holding your breath underwater—you might be fine at first, but you could be gasping for air when the situation changes quickly.

Similarly, many options sellers fall into the “set and forget” trap, thinking that once a trade is placed, the job is done. While this approach may seem like an easy path, it often results in neglecting market changes, missing chances to adjust or lock in profits, and leaving risk unmitigated.

The Fix

Remember, regular monitoring is crucial. While you shouldn’t constantly second-guess your trades, actively managing them ensures you’re ready to adjust to market shifts, secure profits early, or cut losses before they grow too large.

Many traders and investors have an exit plan. Consider closing positions when they reach a certain threshold of max profit (50-75% is common), reducing risk while locking in gains. Active management allows you to free up capital and avoid last-minute surprises that can occur as expiration approaches.

Poor Selections - Options and Underlyings

Picking the wrong stock or option contract can quietly sabotage an options-selling strategy. A stock with low liquidity can have wide bid-ask spreads, which act as hidden costs that eat into profits. If an underlying doesn’t have enough volume, getting in and out of trades becomes more expensive and difficult—something many option sellers overlook.

Compare the Options Chain of Apple (AAPL) and Carnival Cruises (CCL)

AAPL:

The Bid-Ask Spread on AAPL’s ATM Call (230 strike) is ~1.5% ([9.65-9.50]/9.65). This is a very narrow spread, and is what we like to see before entering a position. Now compare this to Carnival Cruise Line’s Options Chain.

CCL:

CCL’s Bid-Ask Spread for the ATM Call (27 Strike) is ~13.5% ([1.70-1.47]/1.70). This is a higher and less appealing spread compared to Apple. It can largely be attributed to Apple’s greater trade volumes and overall prominence over Carnival. The spread needs to be considered before entering a trade, as it can certainly change the outcome.

Beyond stock selection, many traders pick the wrong options—they are lured by high implied volatility (IV) because it means bigger premiums, for example. But blindly chasing high IV can be a trap. Stocks with elevated IV often have good reasons for it, like earnings announcements or major uncertainty. A high premium might seem tempting, but if the underlying moves too much against you, those extra dollars won’t make up for the losses. In many cases, the same volatility that inflates premiums also increases the chance of sharp, unpredictable price swings that work against you.

The Fix

Instead of blindly chasing high IV, look at what’s driving the volatility spike. Is it a short-term event like earnings, or something more structural? Use volatility indicators to assess whether an IV spike signals tradable noise or sustained risk. If selling in high IV environments, consider hedging to limit exposure to extreme price swings.

When selecting underlyings, prioritize liquid stocks with tight bid-ask spreads to avoid unnecessary trading costs. Look for stable price action and choose strikes that offer a solid balance between premium and probability of profit—typically with a delta between 15 and 30 for an optimal risk/reward balance. Avoid highly volatile or illiquid names unless you have a clear risk management plan.

And remember, the goal isn’t to swing for home runs—it’s to make consistent, smart plays that keep you in the game.

For more information on stock selection, read this previous edition—for more on option selection, read this previous edition.

Improperly Judging Assignment Risk

How many times have you entered a trade with the intention of thinking, ‘If it’s assigned, I’ll be happy either way?’ Then, as expiration approaches, your mindset shifts to ‘I really do not want to get assigned, I didn’t actually think that this would happen.’ This happens to more investors than would care to admit.

When you’re excited and the premiums are yours for the taking, assignment seems like an unlikely outcome. But as expiration nears, that sinking feeling of potential assignment creeps in and the truth is revealed.

The Fix

The key is to always be aware of assignment risk and be truthful to yourself, your strategy, and your portfolio. Monitor your positions closely, particularly as expiration nears. If you’re at risk of assignment and don’t want the shares, be proactive in rolling or closing the trade before it’s too late.

Keep a mental checklist: "What happens if I get assigned?" Knowing in advance allows you to avoid emotional reactions when it happens, and helps you execute your strategy like a seasoned pro. The mental aspect of trading is what elevates the professionals.

Not Understanding—Or Fully Acknowledging—The Greeks

Options pricing isn’t just about premiums—it’s driven by the Greeks. Not understanding delta, theta, and vega can lead to misjudged trades. For instance, underestimating volatility crush (a sharp drop in implied volatility) can catch you off guard, especially when selling options.

Without factoring in how volatility, time decay, or directional moves impact your position, you risk unnecessary losses. The Greeks may seem complicated, but they’re essential for understanding how your options behave in different market conditions.

The Fix

Make it a habit to check the Greeks before entering a trade early on—eventually, you won’t trade without them. The Greeks—Delta, Theta, Vega, and Gamma—are essential metrics that provide insights into how an option will behave under different market conditions.

They are complex and require a serious time and effort investment to grasp, but here is a high-level overview of the main Greeks:

• Delta measures how much an option's price will change with a $1 move in the underlying asset, helping you gauge directional exposure.

• Theta shows how much value an option will lose each day due to time decay, which is crucial for managing trades as expiration approaches.

• Vega reflects how much the option price will change with changes in implied volatility, impacting the value of your position.

• Gamma helps you understand how sensitive your Delta is to price changes, providing more clarity on potential risk as the market moves.

Knowing these metrics gives you a crucial edge in managing risk and making more informed, strategic decisions.

Ignoring the Tax Consequences

Many traders focus on profits but overlook Uncle Sam’s cut. Options trades have complex tax implications that can alter your strategy. The IRS taxes short-term gains (on assets held for less than a year) as ordinary income, which can be a higher rate than long-term capital gains. Since most options trades are short-term, profits are often taxed at your regular income rate instead of the lower long-term rate.

Another key consideration is the wash sale rule, which applies if you sell an option at a loss and buy a substantially identical one within 30 days. The IRS disallows the loss for tax purposes, meaning it can’t offset other gains and is instead added to the cost basis of the new position.

Lastly, options on broad-based indices, like SPX options, are Section 1256 contracts and are taxed under the 60/40 rule. This means 60% of the gains are taxed at long-term rates, and 40% at short-term rates, even if the positions are held for less than a year. Understanding these rules can help you plan ahead and avoid tax surprises.

The Fix

Understand how different options strategies are taxed. Short-term gains (held under a year) are taxed at a higher rate than long-term gains, so being mindful of your holding periods can save you money. Section 1256 contracts, like index options, benefit from a 60/40 tax split (60% long-term, 40% short-term), providing potential tax advantages.

To stay on top of any changes, it’s a good idea to follow IRS developments or consult a tax professional or financial planner who can offer guidance tailored to your situation. Keeping accurate records and planning ahead can help you avoid surprises and maximize after-tax returns. After all, no one likes a tax surprise—especially when it could’ve been avoided with some upfront planning.

Investing Mentality vs Gambling Mentality

Though this is the last misconception on our list, it is arguably the foundation on which the previous mistakes rest. If you are not in the right state of mind, you will not consistently orient your decision-making toward a realistic outcome.

For too long, many retail traders have used options as a medium for gambling. Part of my mission is to show investors and traders alike a responsible and strategic way to use options that have long been suppressed.

Long-term strategy and discipline are what separate successful traders from those who merely gamble. Without a structured approach, emotions dictate trades, leading to inconsistent results and avoidable mistakes.

The Fix

Shift your mindset from thrill-seeking to profit-seeking, and your timeline from ‘right now’ to ‘consistently.’ Every trade should align with a well-defined plan that considers risk, reward, and portfolio impact. Develop a rules-based approach and stick to it—whether it’s setting defined profit targets, using risk management techniques, or consistently reviewing your trades for improvement. Many traders do this through monitor their mindset with a trading journal.

Options trading is a powerful tool when used correctly. The key is discipline, education, and execution—understanding the mechanics, respecting the risks, and trading with intent rather than impulse.

Conclusion

There are many more mistakes that could have been addressed, but I believe this list covers the most common ones I have seen.

Even with a solid options-selling strategy, patience and discipline are essential. The stock market rewards consistency and time, allowing compounding to work in your favor. While the lure of shortcuts is tempting, they often lead to setbacks rather than success.

The fastest way to financial goals isn’t through risky maneuvers but through steady, well-managed growth. Avoid common mistakes, stick to a defined strategy, and prioritize risk management. Over time, the small, smart decisions you make will build into something far greater than any quick-win mindset ever could.

Throttle Q&A

What is Gamma Risk?

Gamma risk measures how much an option’s delta changes as the price of the underlying asset moves. For retail traders, understanding gamma is crucial because it can significantly affect the price movement of options, especially when the underlying asset moves rapidly.

• Gamma: The rate at which an option’s delta changes in response to price movements of the underlying asset.

• Delta: Represents how much the option’s price changes relative to changes in the underlying asset’s price.

• High Gamma: Indicates a higher sensitivity of the option's delta to price movements, leading to larger price fluctuations in the option.

Gamma is highest when options are at-the-money, leading to larger changes in the option’s price with small movements in the underlying asset. As options approach expiration, gamma increases, making it more difficult to manage risk without quick adjustments.

Traders need to stay aware of price volatility in the underlying asset to avoid being caught off-guard by rapid changes in option pricing. Being mindful of options with high gamma or those nearing expiration can help reduce unexpected losses from sudden price movements.

What Does “Covered” Mean When Selling Options?

When selling options, the term "covered" means that the seller has offset the risk associated with the option they’ve sold to some extent. This typically applies to covered calls and cash-secured puts.

• Covered Calls: When you sell a call option, you already own the underlying that the buyer can exercise the option against. This means that if the stock price rises and the call is exercised, you can deliver the stock you already own, limiting your risk. For more info, check out one of our previous editions.

• Cash-Secured Puts: When selling a put option, you have enough cash in your account to buy the stock if the option is exercised. This ensures that you can purchase the stock at the strike price if the market price falls below it, minimizing risk. For more info, check out one of our previous editions.

In both cases, being "covered" reduces the risk of selling the option because you have a pre-existing position to manage the obligations if exercised.

How do I handle dividends when selling options on dividend-paying stocks?

When selling options on dividend-paying stocks, keep these key points in mind:

• Covered Calls: Buyers may exercise calls early to capture the dividend, meaning you miss out if assigned before the ex-dividend date.

• Cash-Secured Puts: If assigned, you could receive the dividend, but only if you own the stock on the ex-dividend date.

• Option Prices: Stock prices typically drop by the dividend amount, which affects call option pricing.

Be mindful of the timing of dividend payouts to avoid missing opportunities or triggering early assignment.

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