This is different than when you buy shares directly. While options can be risky, traders have ways to use them wisely. In fact, if used correctly, options can limit risks and, at the same time, allow you to continue benefiting from the gains or losses of a stock. Of course, if you still want to try a home run, the options also offer you that opportunity.
Learn about some of the most common mistakes in options trading so you can make more informed trading decisions. Of course, you may not want to risk anywhere near the maximum amount you are willing to lose, and every decision should be made in the context of your overall trading and investment plan. So why write options? Option issuers receive premium gains in advance, can collect the full amount of the premium regardless of whether the option expires cashless, and can trade liquid options. Ultimately, when deciding on the size of the trade, you should be comfortable with the amount of capital you will lose if the trade doesn't go in your favor.
Ideally, the trade size should be large enough to be meaningful to the account, but small enough that you don't lose sleep at night. The exact amount of profit depends on the difference between the share price and the option strike price at expiration or when the option position is closed. There is nothing stopping it from happening (other than stocks stopping in the market) and there is a possibility that you will lose your entire investment.