The mistakes everyone makes once, and a glossary

Twelve beginner errors with the reason each one costs money, and a working glossary of every term used in Finch.

Twelve mistakes, and why each costs money

Buying cheap OTM options near expiry. You are buying the fastest-decaying asset that exists at the moment it decays fastest. It works often enough to feel like skill.
Judging a trade by whether direction was right. Options have three other axes — time, vol, price paid. Chapter 6's middle row: right on direction, flat on P&L.
Selling naked options for “monthly income”. The income is real; so is the one gap that returns eighteen months of it. Define the risk or size for the gap.
Buying options into an event. Vol crush. If the move isn't bigger than implied, vega takes back what delta gave.
Averaging down a losing long option. Adding theta bleed to theta bleed. Long options are sized once, at entry.
Holding ITM stock options into expiry. Physical delivery and STT on intrinsic value. Square off the day before.
Trading on margin capacity instead of loss capacity. Margin is a deposit, not a limit. A 4% gap doesn't check your margin first.
Ignoring the bid-ask spread on illiquid strikes. A 20% spread is a 20% loss on entry. The chain's OI column is a liquidity map; use it.
Revenge trading after a loss. The second trade is sized by anger, not by the checklist. Close the terminal.
Not knowing your net Greeks. “Neutral” condors with 0.3 delta are directional. The builder shows the net; read it.
Confusing a high win rate with an edge. A strategy that wins 90% of the time with 1:15 payoff loses money. Expectancy = win% × avg win − loss% × avg loss.
Trading every day. Most days the market is priced fairly and there is nothing to do. Edges are occasional; the checklist exists to say no.

Where to go from here

Read the chain every morning for a month before trading — write down the straddle, the OI walls, the IV, and what you expect; then see what happened. Paper-trade the builder's structures with real prices and honest sizing. When you do trade, start with one lot of a defined-risk spread on the index, and keep a journal with the seven checklist answers for every trade. The traders who last are not the ones with the best calls; they are the ones who can show you a year of journal entries.

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Glossary

ATM / ITM / OTM: At, in, out of the money: strike near, favourably past, or unfavourably away from spot.
Assignment: The writer being required to fulfil the option (cash for index, delivery for stocks) at expiry.
Basis: Futures price minus spot. Converges to zero at expiry.
Breakeven: The underlying price at expiry where a position's P&L is exactly zero.
Cost of carry: Interest saved (less dividends forgone) by holding a future instead of the underlying; sets the fair basis.
Delta / Gamma / Theta / Vega / Rho: Sensitivities of premium to spot, to spot again, to time, to implied volatility, to interest rates.
Expiry: The date a contract settles and ceases to exist.
Extrinsic (time) value: Premium beyond intrinsic value; decays to zero at expiry.
Implied volatility (IV): The annualised volatility a premium implies under the pricing model; the price of movement.
India VIX: NSE's index of NIFTY 30-day implied volatility.
Intrinsic value: What an option would pay if exercised now; never negative.
IV percentile: Share of the past year's days with IV below today's; “cheap or expensive by its own standards”.
Lot: The exchange-fixed number of underlying units per contract.
Margin (SPAN + exposure): Collateral held by the exchange against futures and short options.
Mark-to-market: Daily cash settlement of futures gains and losses.
Max pain: The expiry price at which the total value of open options is smallest.
Open interest (OI): Contracts outstanding at a strike; a map of where positions and liquidity sit.
PCR: Put-call ratio of open interest; a contrarian sentiment gauge at extremes.
Physical settlement: Delivery of actual shares for ITM stock derivatives at expiry (since 2019).
Premium: The price of an option, per share.
Put–call parity: Call − put = spot − discounted strike, for the same strike and expiry; the reason call and put time values match.
Skew / smile: The pattern of IV across strikes: puts richer than calls (skew), wings richer than the middle (smile).
Square off: Closing a position by an opposite trade rather than holding to expiry.
Straddle / strangle: Call plus put at the same strike / at different strikes; the market's implied move when at the money.
STT: Securities Transaction Tax; on options, 0.1% of premium when sold, and on intrinsic value when exercised at expiry.
Vol crush: The collapse of implied volatility once an event's uncertainty resolves.

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