The Big Mistake Many Traders Make with Options – And How to Avoid It
When trading options, timing isn’t just important — it’s everything.
Unfortunately, many retail investors make the mistake of treating options the same way they would treat underlying stocks, and it often costs them.
I had a conversation with a friend earlier this week that highlighted this issue. He had loaded up on Exxon options, expecting an energy rotation to drive the stock higher. As the stock dipped, he doubled down, buying more options. His goal was to catch a big slingshot trade on the rebound.
While the logic behind his energy rotation thesis wasn’t flawed, the way he approached options trading was.
The Key Difference Between Stocks and Options
When buying good value stocks, averaging down during a dip can make sense. Building a position in a solid company with strong fundamentals when its price is declining can set you up for long-term success.
But options? That’s a completely different game. Unlike stocks, options are incredibly sensitive to time decay and price movement. Every day that passes eats into the value of an option, especially if the price of the underlying asset isn’t moving in your favor.
That’s why I never average down with options like I might with stocks. With options, you don’t have the luxury of time, and adding to a losing trade as the clock ticks down is usually a losing proposition.
Why Momentum Matters in Options
I prefer to follow momentum. If I’m buying an option, I want the underlying asset moving in my favor as soon as possible. Options already require a directional move to be profitable, so starting a trade when the price action is going against you makes it even harder to come out ahead.
This is where many traders go wrong.
They try to time pullbacks and load up on options when the stock is moving against them. They’re betting on a turnaround, but without the time or margin for error that options demand, the odds are stacked against them.
The Smarter Way: Use Spreads to Buy Time
If you believe in a long-term move, there’s a much better way to position yourself: use debit spreads. Instead of buying a single call option that eats up your premium while you wait for a rebound, you can structure a spread to give yourself more time and reduce your cost.
Here’s how:
- Look Further Out: Check options that expire 6, 9, or even 12 months out.
- Compare Costs: Note how expensive those long-term options become as you go further out.
- Set a Target: Determine the price move you’d expect, then calculate what a spread would cost to achieve a similar return.
For example, if you think Exxon will rise in six months, look at a call debit spread — buying one call and selling another at a higher strike price. This setup reduces your upfront cost while locking in a defined profit if the stock reaches your target.
The Takeaway
Trading options successfully requires a different mindset than trading stocks. Timing is critical, and the strategies you use should reflect that reality.
Instead of treating options like stocks and averaging down on dips, focus on momentum and use spreads to buy time at a fraction of the cost.
This isn’t just a rule — it’s a principle I’ve built my trading around. Options are powerful tools, but to use them effectively, you need to understand their nuances.
Next time you’re considering an options trade, think about how time and direction work in your favor — or against you — and adjust your approach accordingly.
Happy holidays,
Nate Tucci
P.S. Here’s one strategy that I find hard to mess up. And I’m doubling up on it for 2025.
