Trading Mistakes to Avoid – Too Fast and Furious

A common account killer for newer traders is the desire to trade fast moving and volatile tickers, before they’re prepared to do so successfully. These could be highly liquid, big cap tickers (SPX, TSLA, NVDA, NFLX), memes gone wild (GME, AMC) or less expensive and less liquid stocks making moves on rumors or news. The common denominator in all of these is that they can make fast and sharp moves and then reverse just as quickly, and rinse and repeat until you slam down your laptop screen and surrender.

Why would you want to trade these types of super volatile tickers? Simple. Because the more volatile a ticker is, the more green you can make — if, of course, you trade it right. That’s where things get really complicated.

Since the more volatile, highly liquid tickers are often hundreds of dollars per share, many traders trade options on them instead of common shares. SPX options, for example, are a favorite among day traders for their insane price swings. But those swings come at a price—literally. Same-day or next-day SPX options can cost anywhere from several hundred to a few thousand dollars per contract. The appeal? Fast, potentially massive moves. The downside? Just as fast, you can be down 50% in minutes. On top of that, same-day options suffer brutal Theta decay—their time value evaporates over time, even when the underlying stock doesn’t move much. Flat price action or minor moves in the wrong direction can drain your account if you simply hold your position.

SPX vs. SPY: A Safer Alternative

The safer alternative to trading SPX is SPY, which is 1 tenth of the price of SPX, which means SPY options are around a tenth of the price of SPX options. The spreads on SPY options are also much tighter — they are usually a few cents as opposed to a few dollars for SPX. The spreads alone on SPX options can be a dollar or 2 wide, which can turn a green trade red just due to slippage on the entry and exit. But because it’s a tenth of the price, SPY will give you a tenth of the payoff, assuming the same number of contracts.

Here’s why this matters: trading SPX options with a $5,000 account is like bringing a paper boat to a hurricane. A single SPX contract priced at $1,000 risks 20% of your account. Get that wrong a few times and you’ll be out of business quickly. Even if you plan to cut losses at $500 (which is still 10% of your account, but better than twenty), the speed of SPX’s moves, combined with deteriorating Theta and potentially IV, can blow through your mental stop before you have a chance to drink your coffee. Without a hard stop in place, you’ll watch helplessly as your position crashes and burns. Even if you’re playing with a larger account, your average SPX call can still take a big bite out of it very quickly, especially if you have more than one.

In addition to the significant financial consequences of trading short term SPX options, your nerves and blood pressure can get an oversized workout as well. If your SPX position represents a significant portion of your account—enough that losing it would cause real pain—you’ll find it incredibly stressful to watch the price action and your position fluctuate. It’s fine if the price is going in your direction. But if the tide turns against you, that red is going to start piling up fast, along with all the physical effects that go along with the stress and fear of losing.

Your ability to properly trade volatile SPX contracts will also be impeded if the risk you’ve taken on is too heavy for you to bear with grace. There’s a good chance you’ll either end up taking profits too early for fear of losing (which is the lesser of your problems) or you’ll get our of the trade too soon because you can’t handle the red, even when the trade is still within the parameters of your trade plan. The fast moving price action on SPX contracts can make even experienced traders weak in the knees and cut prematurely.

Finally, if you do end up taking a significant loss (which in the scope of normal trading odds is highly probably) that hurts your account, you’ll feel defeated and your confidence to trade again will be shaken. If you lose a few times in a row, you’ll end up in even worse psychological shape, possibly too afraid to trade again.

Speaking from personal experience, trading short term SPX contracts with a smaller account often feels like riding a roller coster wearing a blindfold while being shot at. You have to be super quick and careful to manage your position amidst sudden volatility, and mindful of periods of flat price action that can steadily drain your premium so that even though you’re right on the direction you end up red because of Theta burn. And taking a significant loss feels like getting slapped in the face by an angry ex — painful and humiliating.

The best way to trade SPX options is to trade SPY options instead (and I mean just 1 or 2 to start with, not 10), so that you can get some experience without risking nearly as much. You can always buy more SPY contracts and eventually transition to SPX, if that’s what you decide.

Stocks can also be extremely volatile, with wild and sudden price swings that can shake you out of positions and break your account. Remember the wild price action in GME in January, 2021? If you tried to day trade it, you could easily have gotten smacked in the face in minutes, if you got in and out at the wrong times. There are plenty of pump and dump schemes happening daily on various less traded stocks that can be manipulated for a quick spike or drop, allowing the manipulator to make a quick buck while you end up holding the bag. Large cap stocks, like TSLA for example, can also make quick, extreme moves that can make your position turn red before you know it (especially short term options).

Risk management is more difficult with volatile tickers because your stops usually need to be wider to account for the larger swings, which means you’ll need to either risk more or decrease your size. If you’re only trading a single expensive contract, lowering size isn’t an option.

Solution

The obvious solution to the “too fast and furious” problem is simply to avoid trading super volatile stocks. It might sound counter intuitive to tell a trader to avoid trading volatile tickers, which can potentially net you major profits. But until you have some solid trading experience under your belt, these tickers will rob you and leave you for dead before you can yell HELP. Besides the financial hit, they will leave you with psychological scars, crush your confidence and potentially make you unable to continue trading.

Here are some suggestions for dealing with this situation:

• Trade SPY with small size to learn how the price action moves. If you’re looking to trade E-minis, try the micro e-minis, which are a tenth of the size.
• Trade slower moving tickers. If you want more action, trade them with slightly larger size.
• If you insist on trading short term SPX options, the best way to do that is to only trade with money that you are willing to lose —  100%. I follow an SPX options trader (although I personally don’t trade them) who posts some of his trades. When a trade goes against him he’ll often hold his contracts even until they go down to zero, and many of those trades end up turning around and turning green, for a profitable exit.  Many of those SPX contracts are expensive, but since they make up only a tiny percentage of his account, he isn’t by the thought of losing that money, which is why he can continue holding them and exit green. If an $800 or $1000 contract will make you crap your pants if it goes to zero, then you’ll end up cutting your losses and missing out on a win. Granted, if you followed your trade plan and ended up with a loss, then consider it a good trade. But too many of those “good” trades will eventually put you out of business, and SPX options can expedite that process for you.

Bottom Line

Trading volatile tickers, especially SPX options, might seem like the fast track to big profits, but they come with massive risks that can derail your account and your confidence. The smarter play? Start small, trade slower tickers, and build your skills. Trading is a marathon, not a sprint, and surviving the race is the key to winning it.