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Overconfidence – The Silent Profit Killer in Options Trading

Updated: Jun 23, 2023



When it comes to options trading, there's one word that trips up many traders: Overconfidence. I've seen so many put sellers get overly confident and get in trouble by over leveraging. Overconfidence creeps in subtly just as you're starting to enjoy the profits of selling puts; one successful trade leads to another, and then another. The money starts to flow in, and it can feel a lot like free money. You start thinking, "I can't lose... I've got this down! Instead of selling 1 put I should sell 10!" That's when overconfidence shows its true colors.


At Good Kids Trading (GKT), we're all about trading small, trading often, and trading mechanically. I've seen how a simple rule break can lead to an overleveraged position and, inevitably, a disastrous outcome. Options trading has a reputation for being dangerous, and overconfidence is one of the reasons why options can be labelled risky. But it doesn't have to be this way.


When you're selling puts and the profits are piling up, it's easy to forget about the risks. The math looks so appealing - if there's a 98% chance of a trade working out, why wouldn't you ramp up your contracts? But there's a flip side to that coin: the 2% chance it doesn't work out is real. It's important to remember that these chances, no matter how slim, are still real. When a black swan event happens, and the market moves well past any standard deviations that's the 2% of the 98% of probability of profit.


When a trader feels invincible and on a winning streak, this is how they find themselves in deep water. They're selling 10 puts where they were once selling just 1, and one outside move in a single day, they're underwater. The profit-to-risk ratio becomes skewed, and what seemed like a surefire strategy becomes a quicksand trap where you risk getting margin called.


So, how do we avoid falling into the overconfidence pit? First, by sticking to the plan - trading small. This means keeping your contract numbers low and consistent, resisting the temptation to up the ante when things are going well. We trade small to ensure we're never carrying too much risk on any single trade.


Second, by trading mechanically. This involves a consistent, disciplined approach to options trading that takes the guesswork and emotion out of the equation. We place our trades based on defined criteria and manage them systematically.


Overconfidence is a heady feeling. It's the thrill of a winning streak, the belief that you're invincible. But in the options trading world, overconfidence is the enemy. It's what leads traders to break their rules, take on too much risk, and eventually get burned.


So, remember, the goal of trading is not to win every single trade but to have a consistent process that will lead to profitability over time. Our mantra "trade small, trade often, trade mechanically" is based on experience. This disciplined approach helps prevent the overconfidence that leads to ego taking over and causing overtrading.


If you're looking for a community where you can learn more about options trading, discuss strategies, and stay accountable to your trading plan, consider joining our GKT discord. Here, we're all about learning, growing, and keeping each other in check - so we don't fall prey to the overconfidence trap. Remember, in options trading, it's better to be consistently good than occasionally great.

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