Hello everyone, and welcome to Schwab Coaching. My name is Cameron May, I'm a senior manager here at Schwab, and this is Getting Started with Options. Today we're literally starting with options. If you're a brand new interested trader in the world of options but you've never done it before, you're in exactly the right place. We're going to be starting a series of 10 lessons today. It's going to be lesson 1 in that series of 10. And my intention over the course of that series is to build one's knowledge and confidence in this world of options trading, starting with just the basic building blocks of options. We're going to be going through 10 different strategies of options and ultimately wrapping it up with the discussion of how do we even pick among the various different options?
How do we build more complicated option strategies? So, going from knowing nothing to building complicated strategies and choosing one that's specific to one's outlook for the markets. That's what we're going to be tackling in this series. It should be a great series of discussions. Today we're starting with the first building block, which is known as long calls, long in the world of options trading and investing in general just means we're buying something. So we're going to be getting right into that, but before we can get to the specifics, let me first of all say hello to everybody that's joining me out there on YouTube. Hello there, Tony and Cynthia, AC100, Lisa, Ted, Eva, Frank, Saji, Jack, William, everybody else. Thanks for joining us week after week.
We really do appreciate your attendance and your contributions to these discussions. If you're here for the very first time, I want to welcome you as well. You're in a good place. And if you're watching on the YouTube archive after the fact, if you're just watching the recording of this webcast, that's fabulous. Enjoy Lesson One, but be aware that you're invited to join us in the live discussions. If you'd like to be here, this is a Tuesday series and it kicks off at noon Eastern. So if you'd like to join us, we'd love to have you here. But let's get into this. As we do, I want to throw out the heads up that I'm being joined by my very good friend, Connie Hill, in the live stream chats.
Connie's going to be addressing any questions that I can't get to just during the natural flow of the presentation. And Connie and I would also like to issue an invitation to you, whether you're watching the live stream or the archive, follow us on X. You can follow Connie there at ConnieHillCS. You can follow me there at CameronMayCS. And it really is the very best place to connect with your favorite presenters. All right. But as we get into this, the first thing that we always need to do, of course, is to pause to consider the risks associated with investing and with trading. Risk certainly apply to options as well. So these disclosures are important. Bear them in mind. Options carry a high level of risk and are not suitable for all investors.
The information here is for general informational purposes only and should not be considered an individualized recommendation or endorsement of any particular security, chart pattern, investment strategy. Schwab does not recommend the use of technical analysis as a sole means of investment. If you use technical analysis, you will be in trouble. And it's really important to consider this with your investment decisions and your research; any investment decision you make in your self-directed account is solely your responsibility. OK, so with that accomplished, let's go. Let's provide an overview of how these ten lessons are going to be are going to be playing out. And I do hope I Eva says this will be great. Save your Tuesdays. I think this is going to be really good. Yeah. So, we are going to.
First of all, in our first four lessons, work on really understanding the four building blocks that make up all of the strategies out there in the options and price universe. With options, there are really only two types of options. There are calls and puts, and there are only two things we can do with them, buy them or sell them. So, we're going to be talking about those, buying and selling calls, buying and selling puts as the four building blocks for all of their option strategies. So lesson one today is building block number one, which is long calls. Again, the word long here just means that we're buying something to initiate the trade. When you hear someone use that phrase, that's what they're talking about. The word short means that we're selling something to initiate a trade.
So we're going to move on from lesson one, long calls or buying calls to lesson two, building block number two, long puts. Building block number three, short calls or selling calls. Building block number four is selling or short puts. Then lesson number five, we're going to really get into the pricing of options. What really influences how they perform and how they might fail? Pricing is really key. So we're going to get into the nitty gritty of the pricing of these options and something known as the Greeks, which are measurements for how the pricing might change. In lesson six, we're going to get a little bit fancier with things. We're going to start combining calls and puts into what are called combination trades. So we're going to get in lesson six, building combinations.
Number one is going to be long call spreads and then long puts, long put spreads, short call spreads and short put spreads. And by then, I think you're going to be feeling fairly confident with what the implications for these strategies might be. And finally, in Lesson 10, with a number of different strategies already in our toolbox, how do we choose which strategy to apply under which market conditions? That's going to be the focus, choosing a specific strategy. And that should round out the series pretty nicely. So let's get into what we're going to be covering today. This is our agenda for our discussion of long calls. We're going to be talking about the basics of buying calls. And I'm starting with calls for a very strategic reason.
In my experience in a couple of decades now of doing this, it seems to me that learning about options is most efficiently accomplished by learning about call options first. They're the ones I think that most people relate to most readily. So we're going to be talking about the basics of buying calls, why some traders do choose to do this. There's going to be some important points to remember. And then we're going to be talking about the basics of buying calls. And I think the most important point to remember is we start to explore the possibility of doing our first call trade. And we're absolutely going to be doing example trades, including in today's discussion. So there we go. There are objectives. Let's put them into practice.
And I'm going to start this discussion off with a story. Story time. Get settled in, pull the pillows up, get comfortable. Now, it's a short story. But this is actually how I taught my own brother about options. Because now my brother, by the way, yeah, I'm a Wall Street guy. My brother's a truck driver. But one day we're out for a drive. I can't remember where we're going or what we were doing, but I do know he asked me, hey, Cameron, I've heard about these things called options. Why don't you teach me about options? And so I told him this story. I said, well, let's imagine that you've been paying close attention to what's been going on with real estate. It has been a hot real estate market for the last few years.
I think we're all aware of that. And let's suppose that you look down the road. He actually lives in kind of a rural area. So, you look down the lane at your neighbor's house and you think, you know what? Maybe I want to get in on this real estate game. And maybe I want to buy a house. And you think, maybe I was interested in buying my neighbor's house. It's a nice house. And I think over the course of the next year, it's possible that that house might go from its current value. Let's say it's $500,000. And let's say $500,000. And let's say $500,000. And let's say $500,000. And let's say $500,000. And let's say $500,000.
Dear brother, you think that the value of that house might go up to $600,000 in the next year. Well, what we could do is go to the end of the lane, put in an offer on that house. If you can convince the neighbor to sell it and pay $500,000 for it. But you have in a moment of inspiration, an idea. Okay. Instead of paying for the house, I'm going to run to my sock drawer and I'm going to get this wad. Everybody has $5,000 in their sock drawer. You get $5,000 out of your sock drawer and you walk down to the end of the lane, knock on the neighbor's door and propose that you enter into a contract with one another. Here's the idea.
You knock on the door. Let's say the neighbor's name is John. I'll just put myself in my brother's shoes. So I'm standing on the porch and the neighbor says, 'Hey, Cameron, what's going on?' I say, 'Well, John, I have $5,000 bucks that I want to give you.' And John says, 'Well, this is interesting.' I want to enter into a contract with you, John, if you're open to it. I really like your house.' And John says, 'Yeah, it's a great house. I might want to buy it.' I haven't decided yet, but I'm going to give you $5,000 bucks just so that you won't sell it to anybody else while I think about it for the next year.
John's like, well, so you're going to give me $5,000. Yeah. I'm going to give you $5,000. But you just have to promise don't sell the house to anybody else. I get the exclusive right to buy that house. I have the option. To buy your house for the next year. And let's just agree that if I choose to buy it, I'm going to pay you $500,000 bucks for it. John says, well, heck Cameron, a house is worth $500,000. Sounds like you're giving me $5,000. Yeah. That's yours to keep. And it's not a down payment on the $500,000. I will pay you an additional $500,000 if I choose to buy the house.
If I choose to exercise my option, this contract that we're entering into. John says, 'Heck yeah, let's do it.' So the exchange is made. And I also say, well, John, before we do this deal, I want to let you know, I've also written in, in the deal, this, this contract is transferable. If I decide I don't want the deal anymore, I can sell it to somebody else if I want to. And they will then have the right to buy your house. John says, 'I don't care what you do.' As long as I get, I already have my $5,000. If I get $500,000 houses sold. Okay, great. So that is, um, basics of a call option. Let's, let's put ourselves in my brother's shoes.
Let's say six months down the line, he looks down and he looks up property values and the value of that neighbor's house is now up at $600,000. He thought it was going to take a year. Whoa. The house is now at $600,000. Now he has the right to buy an appreciating asset for a discounted price. He now has a hundred thousand dollars of, of, uh, intrinsic value in this contract that he only paid $5,000 bucks for. Obviously we're using kind of extreme examples here, but this is really very much like, like the, um, like the call options work. At that point, he may have a couple of choices. He might decide, Hey, I'm going to call up my neighbor and say, Hey, John, I want your house exercise the right to buy that house and cash in that a hundred thousand dollars of equity by selling the house to somebody else.
Right. Sell it at 600 ,000. He bought it for 500 ,000. That's a hundred thousand dollar value out of a $5 ,000 investment, a $95 ,000 profit hypothetical scenario, but that's the way it could go. Now, um, what else might happen? Well, what if he reevaluates at six months and house isn't increasing value at a year, the house isn't increased in value. And he decides I don't want the house. Guess what? He doesn't get his five grand back from John. He's lost that investment. He doesn't get his five grand back from John. He doesn't get his five grand back from John. He's lost that investment. He's lost that investment. He's lost that investment. He's lost that investment. So that's all my, uh, story.
And, and, and as I told this story to my brother, he started asking me good questions. Well, Jack camera. So what, tell me again, am I stuck in this? No, you're not stuck in it necessarily. As long as there's some liquidity here, you may be able to transfer this asset to someone else. These are all good questions, but let's go apply this to the stock market world. So I'm going to go to the Thinkorswim desktop platform, use Amazon as an example for a stock call option. And so let's put ourselves in the shoes of a trader who hasn't been following real estate prices, but instead they're looking at the price of stocks and maybe they observe, and it's just a basic, this I'm not doing advanced technical analysis here on a chart, but let's say they've noticed with Amazon, here's the stock that's tended to run up and pull back, run up and pull back.
And each time it runs up, it's been going up about 25 or 30 bucks and then pull back for a week. Run up 25 or 30 bucks and then pull back for a couple of weeks, and then run up over the course of, and each time these are generally about a month. Obviously not every stock is going to behave this way. This is specific to the current conditions of Amazon at the moment, but it just runs up and pulls back and runs up and pulls back. And look what's happened recently. Maybe our trader has noticed, boy, it's recently run up, it's pulled back and it could be maybe a week into the next possible. It's always, it's only what's possible. It's not what's actually happened. Possible that maybe we're heading back up.
If we started down here a week ago, and the lows there were, you know, about two, let's call it a 215-ish. And we go up about 30 bucks. That might take us up to 245 possibly. So maybe our trader is thinking, Hey, this stock could go up to 245 bucks. Well, how might they take advantage of that move? Well, one thing they might do is they might just buy some shares. Let's say they buy a hundred shares of the stock right now at about $223. That'd be about a $22,300 investment. Or maybe they do what we just discussed and they get into a contract with someone. They're not going to buy the stock right now, but they're going to get into a contract where they have the right to buy the stock for a specified period of time.
So let's go to our trade tab. I'm going to make sure that we have Amazon typed in here. And down below, these odd combinations of numbers and letters, this is sort of like a bulletin board of potential contracts that a trader might get into. And we're going to focus on, well, one thing that we might point out here is if the, if the trader thinks, Oh, this might go up for a month. So maybe I'll get into a contract for a month. Let's double that. Let's make sure that we don't run out of contract time. So let's go for two months. Let's go to our trader. Oh, Hey, Will says, howdy, I'm late. My apologies. No, welcome to the show, Will. This is scheduled to be archived.
As long as I don't hit a technical glitch, you know, that you can go back and watch the archives for these. But the first thing I'm going to do is I'm going to look at these numbers in parentheses, and let's go out here to this one that says 73. These are contracts that are, that are effective for 73 days. In our house example, it was for a year. We can go anywhere with options on Amazon, anywhere, from just a three day contract, all the way down to 891 days, multiple years. Well, if we just think this is going to pop up for a month or so, maybe we only need a month or two on the contract. So let's go out here to this one that's 73 days, or in other words, this deal extends through the 21st of March of 2025.
That's what that means. And also you'll see the number 100 here. That means that, that, uh, we're entering into a potential contract to try to trade, not a house, but 100 shares of stock. We would call these a standard, uh, con standard options contract. So I'm going to click on the little arrow here, and this is going to show available contracts for the 21st of March. And if we look down the center column here, it's titled with the word strike. Hey, these are prices at which you can strike a deal conceptually with another trader out there in the options trading universe, but we're striking a deal to potentially exchange shares at a fixed price. So I'm going to pop down here and let's see the stocks trading about two 23.
How about we look at two 20? This is, uh, we're entering into, into an example contract here. This is what we're going to be doing in the next couple of minutes. An example contract that gives us the right, not to buy a house for $500,000, but the right to buy a hundred shares of Amazon for $220. And just like in my story, we had to pay $5,000 bucks-just an example premium to get into this contract. It looks like these ones right now are trading. At about $15. 40 per share to $15. 50 per share, a little bit, you know, 15 and a half dollars per share on a hundred shares means about a $1550 investment. I'm going to go ahead and do that trade right now.
And I know that some of you are saying, Cameron, you're going too fast. My heart rate's up, my blood pressure's rising. I'm going the first time we place a trade, it can be kind of an emotional moment. That's okay. We're in a simulated trading environment. There's not any real risk here. So this is just a learning opportunity. But I'm going to place an order to buy these contracts. Now, if we want to buy contracts, we just click on the ask price next to the contract that we're interested in. If we're looking to sell those contracts, we click on the bid price. But I'm going to click on the ask price, and that brings up this buy order. And how about today, just to keep it simple, let's just buy one contract.
So again, it's the Amazon 21st of March, $220 call. That's the right, we're going to have the right to buy shares for that much. And the price that looks like we're going to be paying to enter into this contract, about $15. 50 per share. Now, I'm going to do something just in the interest of moving the discussion along. I'm going to change this to a market order. When we change the market order, we're going to be paying $15. 50 per share. Now, I'm going to do something just in the interest of moving the discussion along. I'm going to change the market order. When we acknowledge, hey, it might be $15. 50, it might be $15. 40, it might be $15. 60, it could be some other number.
I'm just willing to pay whatever the market price is to get into this deal right now. I'm going to click confirm and send, and we're going to buy that one contract for 100 shares, the right to buy 100 shares of Amazon through the 21st of March at $220. And it looks like that's going to cost us around $1,500, including a $0. 65 commission. So instead of just, instead of, let's say, $1,550 or $1,535, we're going to have to tack on $0. 65 in commission. And let's send that order off. Oh, boy, we just bought that at $15. 40. I just want to break down in greater detail what we just did.
We just entered into a call contract, and it has, and I know that anytime we enter into a contract, this is a real contract, by the way. I know that, when, when someone enters into a contract, there can be lots of terms to that contract. You know, when you're signing off, when you're at closing date for a house, big, big, thick stack of papers, and your realtor sits there and tries to explain it all to you. Let me explain the terms of this contract. Okay. Number one, we just paid for the right to buy 100 shares. In this case, that's 100 shares of Amazon. We also struck a deal that we have the right to pay a specific amount for those shares of Amazon. So, in this case, it's $220 per share.
Now, in exchange for the right to buy, or to buy 100 shares of Amazon for $220 per share, we paid what's known as a premium. You know, when you're buying insurance, you pay a premium-for basically a contract with an insurer. In this case, we're using the same terminology just in the investing world, paying a premium to enter into a contract to potentially exchange shares of stock. And in this case, we paid a premium of $15. 40 per share, or in other words, $1,540. That's how much. Ranjeet says, can I, can you please tell me the difference between a call and a put? Sorry, you're a novice. Absolutely, we'll be doing that. So, Ranjeet, next time we meet, so lesson number two is going to be all about puts.
Okay. But in our call contract, we also are in this contract for a period of time. We have the right to buy 100 shares of Amazon. We have that right to buy them for 220 bucks, but only for a certain period of time. And in this case, it's through the 21st of March, or in other words, for September. So, we're in this contract for 73 days. Now, another element of this contract is that it is transferable, just like in the story that I told you, that I told my brother. When we buy into a contract, let's see, Bell B11 says, how many days for long-term investing, meaning how far into the future in days? That's a good question. I'm not going to go too far into the timeframe of a trade, but I'm going to go too far into the trade today.
But one general rule of thumb that some traders will use is they'll figure out how long they think they'd like to be in the trade, and then they will double the amount of days that they actually purchase. And there's some good reasoning for that, including making sure they just don't run out of time. They had a good idea and didn't give it enough time to work. But also, time itself is working against our trader here. Okay. I'll talk about that. But one question I had when I first started trading was, okay, so if I pay this $1,500 for this contract, now I'm stuck with it, right? Now through 21st of March, even if the stock isn't going where I thought it was going to go, I'm just stuck?
No. If we're dealing with liquid options, the trader is very likely to be able to just get out of the trade if they want to sell at a future date, but it's dependent upon liquidity. So that's a consideration. We're going to be talking about considerations. We're going to be talking about negotiations for these trades as we finish out this discussion. But yeah, just know that if the trade is going against us and we want to sell and try to preserve some of the value that we invested, that's a possibility. Or if the trade is going really well after not 73 days, but let's say two or three weeks or whatever, the trader might decide, you know what? I've made enough money. Let me sell and get out of this long position.
But finally, we need to be aware that there is both a buyer and a seller. In this transaction. So just like in my story, there was a contract between my brother as the hypothetical buyer of the contract and his neighbor, John, as the hypothetical seller of the contract. My brother was the one paying the five grand. He's buying something. He's buying the right to buy the house. The neighbor is the seller of the contract. He's the one receiving the $5,000 bucks. So in this case, which one of these two are we? Well, we are the buyer. We are going along this contract. We're paying $1,540 in exchange, having the right to buy a hundred shares of Amazon for $220 for the next 73 days.
And I think once you understand this, the next thing that comes up is, well, what might happen from here? What if Amazon does rally on up to $245? Well, heck, we'd have the right to buy shares for $220. That's a $25 value. Could have some additional value that we'll discuss a little bit later, but we have the right to buy a $245 stock for $220. That's a $25 right for which we paid $15. That's theoretically, that would be in the neighborhood of $1,000. 60 to 70% return. And what if the stock goes beyond that? Now we still have the right to buy shares for 220 that are worth $245, $250, $260, $ 270.
The upside potential in this trade is unlimited and really only limited by time. Well, what else could happen? If the stock goes down, not so good. We paid for 73 days of potential. Each day that ticks away and the stock's not going the right direction is chipping away at the value of this $1,540 investment we made. And if the stock falls, we could lose the full value of this option. So what is the upside potential? Unlimited. What's the downside risk? The investment amount. Okay. Oh, BLB11 says, thanks, but what's the timeframe between short and long-term 75%? I'll let Connie address that question because we're not going down that path today and I have limited time, but it's a good question.
And I'll tell you, actually, there can, just to summarize it, there can be a difference of opinion on what is long-term and what is short-term. But in any case, let's go back to our slide deck and really break down what we've done here, okay? Let's talk about what we've learned. Buying calls, what does it mean to buy a call? Well, buying a call gives you the right, but not the obligation. We do not, we're not obligated to buy these shares, but to buy the underlying stock at the strike price, buy 100 shares of Amazon for $220 at any time, doesn't have to be on the 73rd day. It could be on day 50, could be on day 20, any time up until the contract expires.
One option contract represents 100 shares of stock in a standard stock option contract. What is the goal as we're doing this? Well, our outlook is bullish. A call buyer typically would not want to buy a call if they thought the stock was gonna go down. Walking in the purchase price of a stock that's falling in value does not deliver value to that trader. They're looking to benefit from a swift upward movement in the stock's price, and the faster, the better. We have a limited amount of time, so the faster it can go up, the further, the better. The maximum potential reward for a long call is unlimited. But should the long call position expire, in this case, if we hit that 73rd day, and our stock isn't even worth the 220 bucks that we have the right to buy our shares for, that investment is worthless, it's valueless.
The entire cost of the call position would be lost. So that's just a recap of what we've gotten into. And I just wanna put a finer point on some of the elements of trading long call options. So what are some of the potential benefits? Well, as we've already stated, the maximum gain in a long call option is unlimited. The higher the stock goes, in this example, if we've locked in a contractual purchase price of $220 on Microsoft, let's say some amazing news comes out and the stock jumps $100 in value, is it likely? No. Could it happen? Yes. If that stock jumped up to $320, we still have the contractual right to buy for 220. And the higher the stock goes, the greater the potential return in this sort of a thing.
It also offers leverage. Leverage allows you to benefit from the upward movement in a stock's price with this much smaller investment that would be needed to purchase the stock outright. Now, I think some of you might've said, Cameron, it sounds expensive, $1,540 bucks for this call option. Well, that allows the trader to lock in a purchase price of $220 for 73 days. Another way they might've accomplished that is just by buying the stock. The stock was trading around $223, so 100 shares to buy the stock outright is $22,300 versus $1,540 invested. So if the stock goes up, let's say it goes up to that 245 and we bought the shares outright for 223, now that would be about a $22 return.
Which isn't bad. That's about a 10% return. But as we already saw on the option, if we pay the $1,540 to get in at 220, and the stock is later worth 245, well, that's a $25 return on a $15-ish dollar investment. That's like a 67% return. 10% return on buying the stock, 67% return on buying the option. You can see the leverage, but leverage works both ways. A stock buyer, if the stock goes down, they're losing, let's say it goes down to 215, now they've lost a relatively small percentage of their investment. Whereas the call buyer, if it gets to expiration, they may lose the full investment. They might lose 100% of their $15. So the leverage can work in either way.
There's also an associated timeframe, potential benefits of this can be used for short and just even intermediate terms. If you're in a long-term trading, contracts really aren't available beyond about three years. So the truly long-term, it might require a trader to do multiple trades over time. So what are the potential risks? And where might we break even on a trade? Well, we know that the maximum loss is equivalent to the amount that's been paid for the option. So the total amount paid to enter the trade, in this example today, our Microsoft call that we paid $1,540 for, if the stock isn't even worth 220 at the end of the 73rd day, well, now we have the right to overpay for shares. That has no value.
And we lose the $1,540 investment. That would be the maximum that could be lost theoretically in this trade. I say theoretically, because if we tinker with it, if we add to the position, for example, or if we choose to, you know, exercise our contract and buy the shares and then the shares go down, it changes the risk-reward scenario. But just buying the call, we could lose the full amount. Now, this contract is also exposed to time decay and volatility, and make sure that you watch lesson three, because, pardon me, lesson five, we're gonna get deeply into these elements. But when we're buying a contract, think about this. Here we are on day one, the trader has looked at this, and, look at the chart, they think, ooh, this stock is set to skyrocket.
If it does what it's done four times in recent history, it might run up to $245. And so I buy this contract for 73 days, and here we go. And then after one day, nothing happens. Okay, well, that's all right. I still have 72 days. And then another week goes by, oh, now I have 65 days left on this contract. And then a month goes by, I only have 35 days left, and the stock isn't going where I thought it was gonna go. I now have a contract with only 35 days, which gives me the right to buy shares for $220. I used to have a contract with 73 days, all that potential, that gave me the same right to buy the shares for 220.
Time is decaying the value of that option. There is a concept known as time decay in the trading of call options that we need to be aware of. So when the trader buys call options, and it'll apply to buying puts as well, the faster the stock can get going in the intended direction, the better, okay? Also, rising and falling volatility levels can affect the pricing of options. I do want to say we'll talk about that in Lesson 5. There's also a break-even point. Think about our trade at expiration. So the break-even is a quick calculation. You just take, the strike price, in our case, $220, and add the premium that we paid, $15. 40, that gives us $235. 40. There's a very significant meaning to that number.
That is the price at which the trade breaks even at the expiration point of this contract. So think about this. Let's say we pay the $15. 40, lock in a purchase price of $220 today, roll the clock forward 73 days, and our stock is at $235. 40 on the button. All right, well, you'd say, okay, well, that's good. Stock's worth $235. 40. I have the right to buy the shares for $220. That's awesome. That's a $15. 40 discount from the current price. Current price of the stock. Great. Except I paid $15. 40 to get that discount. Broke even. That trade is breaking even at expiration at $235. 40. So we have to be aware of that number if the intention is to hold all the way till expiration.
Stock has some work to do. It needs to get up to about $235. 40. It needs to get up to at least $235. 40. And also, please do note, although buying an option, holding a long call, buying that call, gives us the right to own the shares, it's not exactly equivalent to actually owning those shares. It does not carry with it things like voting rights. And it also doesn't allow us to capture dividends. Options call buyers are not paid dividends. All right. So if a trader is comfortable with the concept of call options, which stocks might they look for? What kind of stocks might they look for to trade options on? What might be good candidates? And then which contracts might they choose to get into with those stocks?
Well, number one is for technically oriented traders. They might look for stocks that seem to be going up in a bullish trend. They might also emphasize liquidity. Highly liquid stocks tend to have higher liquidity with their options. Illiquid stocks, low volume stocks tend to have low liquidity in their options. And that actually affects the way that options are priced. It can spread out what we call the difference, the distance between the bid price and the ask price. So higher trading volumes are typically emphasized for the stock on which one is trading the options and looking at the trading volume on the options themselves. This will result in maybe what we call a tight bid-ask spread. I do want to talk about what I'm referring to here. Let's go to our trade.
Here's the contract we entered into. And you'll notice I mentioned the bid price and the ask price. In trading, buyers of all types, options, stocks, and so on, typically pay the ask price. Hey, I want to buy that option from you. How much are you asking for it? Oh, I'm asking $15. 40. Okay, I'll pay $15. 40. If we turn around and want to sell those contracts, we might say, hey, I want to sell these contracts. What will somebody bid for them? And then we sell to the highest bidder. So buy the ask, sell at the bid. So if we got immediate buyer's remorse right now, paid $15. 40 for these contracts, and we want to sell them immediately, right away, how much are they selling for at the moment?
How much might we receive? $15. 30. It's a little bit of a difference between purchase price and the sales price. So this is known as the bid-ask spread. And if that's a wide difference, that can really set us back, put us in a hole. That difference tends to get wider in less liquid options. So this is a 10-cent difference on our $15 and 40 cent contract, a 10-cent spread between the bid price and the ask price. Other options on the liquid stocks, it might be a dollar, it might be $2, it might be $3. It could be more. So yeah, for traders of options, it's a big deal. Liquid stocks can have wide spreads between the bid price and the ask price, meaning we're paying higher prices and selling at lower prices, which is sort of the opposite of what trading is all about.
Now, also from a technical perspective, our trader might be looking for stocks that are pushing up through price ceilings, breaking resistance, especially if that's accompanied by high volume. Bouncing off price floors, anything that might be indicating that price is about to go up, which is what we want. And specifically, they might be looking for some. Not everybody does it this way. They might be looking for something called a CAHOLD, close above the high of the low day, which is an entry signal on a chart, close above the high of the low day. So to go look at that on our chart, you might see with Amazon, this is interesting, recently ran up the typical 25 or 30 percent. So this is an entry signal on a chart.
This is an entry signal on a chart. This is an entry signal on a chart. This is an entry signal on a chart. This is an entry signal on a chart. This And then it pulled back. What does this look like to some of you who use price pattern analysis in your planning of trades? Kind of looks like a bull flag. That's OK. If you don't know, fancy technical trading terminology just means the stock ran up and it pulled back. Well, the trader might be looking for some confirmation that the stock is starting to rise again. So as it pulls back, they might look for the lowest day in that pullback and wait for price to close above the highest point of that low day, closing above the high of the low day.
It might signal that prices are starting to rise again and maybe the momentum has returned and stock is off on its next run. Obviously we'll just see where it goes from here, but that's a potential consideration when planning the trade. Well, also we need to know when to buy and when to sell. So some of the considerations when buying calls are the outlook for the stock should be bullish. The strike selection, some traders choose what are called at-the-money strikes while others trade in-the-money strikes. And some actually will also go out-of-the-money. What does that mean? Well, at-the-money just means the strike price that's closest to the current price. So if the stock is trading, you notice our stock was trading at 223 and I chose to buy a contract that allowed us to buy at 223.
That's pretty close to the current price of the stock. If I had chosen to buy a strike price at a lower level, let's say 210 bucks versus the price of the stock at 223, we'd say that's in-the-money. It's allowing me to buy the stock at a steeper discount. But those sorts of things might enter into which contract a trader chooses, whether we buy at the money or in the money, just know that the better deal we want, the lower price we want to lock in, if our stock's trading at 223 and we want to lock in a purchase price of 210, it's going to cost us more. The premium goes up. Also, expiration date when buying these calls, the further out the expiration date, the more expensive the option will be.
So if we want more time on the contract, that's great. It gives that contract more potential, but we have to pay for that potential. And finally, we have our position size, how many contracts the trader might buy. In this example, we bought one contract for $1,540, meaning, and if that contract lost the $1,540 bucks, for somebody that has an account of $1,540, that could be devastating. For somebody that has a million-dollar account, it might be so small, it's hardly worth considering. Maybe they should have bought more contracts or maybe they choose to buy more contracts. Yeah, some traders base that size of the position on an assumption that they lose the whole amount. So if they can afford to, let's say, let's say our trader could afford to lose $3,500 or $3,000.
Maybe they do two contracts. All right, but a final consideration, when might we exit these calls? Well, if the trade is going well, in this case, maybe if it goes up 245 bucks, we just sell and take our profit. Now, there are other ways that traders might make their plans. This is just an appeal to those that use more advanced technical analysis in their trading. Some of you might use, yeah, an average true range target. Some may use what's called a swing trade target, like what we just did. Maybe we think it's gonna swing up to 245 bucks. Maybe we think it's gonna swing up to 245 and sell. But yeah, if we hit our target, maybe the trader sells and takes the available profits.
If the trade isn't going well, maybe the trader has a plan and we're gonna get out if we lose 30% of our investment or 50% of our investment. It's just not going where we thought it was gonna go. It's not doing it in the timeframe that we expected. Maybe the trader just pulls out. Or if something else changes, maybe an earnings goes poor. There's some corporate news that changes the trader's outlook. Just whatever might change the trader's view on that stock. They were bullish, no longer bullish. Maybe they don't wanna be in a leveraged bullish position anymore. So that kind of summarizes long calls. Now, what I wanna do here, let's go to our trade. And I just wanna quickly put on a stop order.
So to place the stop order, if we paid 1540 for it, let's say our trader is willing to risk half of that. What would that be? Seven, it would be a 770. Let's right click on our Amazon position. Let's create a closing order to sell that, but only if it falls to let's say, well, let's say it sells, it falls by half. Let's say it goes down to 740. Is that right? 770 is what I said. There we go. I wanna make sure that's a good till canceled order and let's confirm and send that. So we bought it at 1540. We don't want it to drop to 770, but if it does, that's a plan to get us out.
Now there's a reminder down here, in addition to the commission to be paid, due to potentially wide markets or liquidity risks at the time of activation, this order may be substituted with a limit order upon activation, worked until filled. Let's send that off. All right, so there we go. Guys, we've accomplished what we set out to do today. We've defined what a long call is. We've looked at some important considerations, some key numbers. We've covered some basics for stock selection, option selection, entry and exit considerations. And we've even followed some steps that placed an example long call trade. So that is building block number one. I do hope that you'll join me in next week's discussion of building block number two, which is long puts-understanding the other side of the equation.
Somebody asked us the question earlier in the discussion. We're gonna cover that next week. So time for me to let you go. But as you do go, just remember you have other educational resources at your disposal that I hope you're all taking advantage of. Number one, make sure that you're subscribed to our Trader Talks channel. You can find the subscription link right down below the display window. Just click on that. It doesn't cost anything, but our YouTube channel is the best place to find our previous webcasts, where you can find those in playlists organized by series. You can also join our live streams. You can even do keyword searches for topics of interest. Now, second thing is make sure that you're following us on X. You can follow Connie on X at Connie Hill CS.
You can follow me there at Cameron May CS. Fabulous resource-the best place to connect with your favorite presenters in between the live streams. And also, I want to say thank you to everybody that's already clicked the like button. We have about 200 people watching the live stream right now, and already 73 people have already clicked the like button. Thank you for doing that. It sounds like applause to your presenter. And it boosts the presenters' webcast in the YouTube algorithm. So gets our webcast out to more viewers and potentially can do more good out there. So thanks for clicking that like button. Everybody, time for me to let you go. Thanks for giving me time today. I will see you next week for our discussion, lesson number two, which is getting into long puts, building block number two. I'll also look for you on X, but whenever I see you again, until that moment arrives, I will wish the very best of luck. Happy trading. Bye-bye.
