Myths

Many people are under the illusion that stock option trading is a sure way to lose all your money. Not true.  Think of this - you usually buying CALL options requires less capital than buying the stock outright.  So this type of option trade allows you to limit your loss to the capital invested, but you also have the possibility of making 200% or more on your trade.  Once in a while you can make a very huge profit on a single trade.  Think Google.  If you had bought their Dec 2004 150 Call soon after they went public, before the end December 2004 they had already touched $199.00 a share.

MYTH - 80% to 90% of all options expire worthless.
Not true, according to the CBOE, about 30% of all options expired worthless.  So it is not as high as 80%.

MYTH - Trading stocks is safer than options.
Actually options allow you to invest with far less money for a potentially higher return as a percentage.

MYTH - The spreads between the ask/bid price is too great for options.
That may have been true 8 to 10 years ago, not anymore.  The spreads are about 5 to 10 cents for most options.  The options market has grown and has become very liquid, as a consequence it has also become very efficient and is also reflected in the bid/ask spread.

MYTH - It is too hard to understand the different option strategies.
Again I say not true.  It is actually easy once you spend a little time studying it.  Like anything else in this world once you understand how it works it becomes second nature to you as a trader.

Mistakes

Have you ever been in a situation where you had one loss after another?  If so did you ever stop to think why?  You probably thought you were just plain unlucky.  When it comes to trading options, I do not think luck or lack of it has anything to do with the outcome of your trade.

MISTAKE 1:
Entering a trade without a good understanding of the stocks' price movement, in other words -- not enough research.  A lot of traders believe what they read on the web, bulletin boards or financial gurus.  How often have you heard conflicting analyst reports for a given stock.  In the past I have read of upgrades and downgrades on the same stock by different brokerage houses.  So who is right?  Do your own research.  Every stock has it's own trading patterns everyday.  Just last week certain stock ended down even after a favorable earnings report.  The analyst do their own research before they come out with their predictions.  What I am saying to you is do your research on the same stock and if you end up agreeing with the analyst, then go for it.

MISTAKE 2:
Choosing the wrong option series.  What I mean by this is a combination of strike price and expiration month.  If you do not have enough cash to buy the option that gives you the best odds, then do not even bother taking that trade.  If you buy an option that is at-the-money or slightly in-the-money the delta is 0.50 or better theoretically.  The underlying stock only has to move 1 point up or down for your option to pick up .50 cents in value.  If the option is deep-in-the-money then your delta could be as high as 1.0 in which case your option price is going to move 1 to 1 with the underlying stock price.  Compare this to an option that is way out-of-the-money and the delta is only .05 or so.  You are going to waiting a long time to make a profit unless the stock is volatile and can jump in the right direction quickly.

Time to expiration is also very important.  Pick an option that expires very quickly and if you picked the wrong strike price too, then you might as well say goodbye to your principle.

MISTAKE 3:
Selling too quickly or hanging on too long.  It happens more often than you might think.  In the case of selling too quickly, this happens because of fear and the trader wants to minimize his/her loss only to see the same position back in the green after a day.  Also selling too quickly but with a small profit only to see a bigger profit after 1 or 2 days on the same option position.

The worst is waiting too long to the point that the option is worthless.  This happens when one falls in love with his or her position.  You should try to never let that happen.

The way to avoid these two pitfalls is to have a strict profit exit point and a stop loss point.  Once you set this rule for every trade follow it with a vengeance.  You will stay longer in the market and over time make money.  If you do not set rules before each trade then and you are going to be trading directionless.

MISTAKE 4:
Last but not least is putting too much money into a single trade.  Don't do that.  How much is too much?  I think any one option position should not exceed 10-15% of your total trading portfolio.

Conclusion

If you remember to avoid some of the most common mistakes, you are likely to have a profitable career trading equity and index options.