tastytrade offers viewers an opportunity to learn. Studies on probabilities and strategies can help new and experienced traders alike become better traders. One of the other benefits offered is trading experience, mistakes made along the way and how to learn from those mistakes. No trader is flawless and we all fall into traps, some more common than others.

Not Understanding Probabilities

The tastytrade “style,” if you will, is predicated on using probabilities to our advantage. If an option has a 16% chance of expiring in-the-money (ITM) then it has an 84% chance expiring out-of-the-money (OTM). These are probabilities, not absolutes and that is where some traders may find themselves in trouble when low probability (16%) events occur.

To avoid those outlier events that go against a portfolio, the portfolio needs enough uncorrelated positions to avoid being hurt by statistical outlier trades.

Trading Illiquid Stocks

Liquidity is crucial and its importance cannot be overstated. Liquid stocks have enough volume and narrow bid-ask spreads so trades can be entered and exited without being subject to “slippage.”

Slippage is what happens when bid-ask spreads widen and a position cannot be exited without giving up money on slippage. Profitable trades can become losers simply because of an inability to exit. That is why we exclusively stick with liquid stocks whose options are also liquid.

Buying Out-of-the-Money (OTM) Options

One of the great attractions that long options offer is their ability to leverage a small amount of money for a potentially large profit. However, just because something can be leveraged and might happen does not mean it should or will.

The segment of Skinny on Options Data Science from February 18, 2016 "Buying Cheap Options" showed how only 1% of cheap options bought for $0.05 expired for a profit and only 2% of these options were up more than $100 at any time before expiration.

The fact is, buying OTM options just doesn’t work. There is a reason we sell OTM options.

Legging in and out of Trades

When entering a defined risk trade, we know our max profit and we know our max loss. Hence, “defined risk.” We have all had trades that tempted us to “leg out” or close one side of the trade while leaving the other side alone. When we leg out of a trade the defined risk aspect can go out the window. We can change the risk parameters, potentially exposing ourselves to greater losses in the process. If we enter a trade as a spread, we exit as a spread. Same rules apply to iron condors and all our defined risk trades.

Misunderstanding Size

When trading futures, we need to have an understanding of the notional size of the contract being traded. It is very easy to quickly get into a trade that is too big. Just because an account can trade in futures does not always mean it should. Trading in as many different products as possible is part of the tastytrade strategy. Sometimes, the operative words there are, “as possible.” Maybe you can afford a Winnebago, but try parking it in your two-car garage and you may take down the whole house.

Traders are competitive and are willing to take some measure of risk. That is good, usually. When we take risk, we have to take smart risk. Knowing what we should trade, how we should trade, and our probabilities are key to becoming a successful trader. Mistakes are okay; we learn from them. But there is no reason to repeat mistakes other traders have already made for you.


Josh Fabian has been trading futures and derivatives for more than 25 years.

For more on this topic see:

Best Practices | Top Mistakes Traders Make: August 29, 2016