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. Over the last eight weeks we've been building up through a series of lessons to bring along that brand new would-be trader of options from knowing nothing about trading option strategies to being able to build fairly complicated combination strategies. This is lesson nine in our series of ten, and today we're discussing building a combination strategy known as a short put spread, also known as a short put vertical. It's a bullish strategy we can add to our potential list of toolbox strategy candidates. I'm really looking forward to today's discussion. Before we can get to that though, let me first of all say hello to everybody out there.
Great to see you all on YouTube. Hello Ranjit and Stacey, David, Robert, Jay Richardson, Richard. Greg, Life in the Fast Lane, John, Ted, Jack, everybody else. Thanks for joining us week after week. We really hope you've enjoyed those first eight lessons. We really 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. I'll invite you to just stick around, watch the whole lesson, even if you haven't seen the first eight, but I'll also show you where you can find those first eight if you want to get caught up. And I also want to say if you're watching the YouTube archive. After the fact, if you're just enjoying the recording of this presentation, yeah, enjoy that webcast, but also be aware that you're invited to join us in the live discussion.
This is a Tuesday webcast series, kicks off promptly noon Eastern. We'd love to have you here in the live stream audience. And as for our live stream audience, I also want to give them a heads up that my very good friend Connie Hill is hanging out in the chats. She's going to be addressing any questions that I can't get to. Connie knows all about this stuff. Connie and I have now been working together for about 20 years, so we know that she brings a lot of knowledge to this discussion. Thanks for having my back there, Connie. And Connie and I would also like to issue an invitation to everybody watching. If you have an account with X, give us a follow. Follow your favorite presenters on X. You can find Connie there at ConnieHillCS.
You can find me on X at CameronMayCS. That really is the very best place to connect with your favorite presenters in between. And we're going to be talking about the live streams. But let's get right into this lesson nine. And as we kick things off, of course, we need to first of all consider the risks associated with investing and trading. Certainly applies to options trading, so bear these important disclosures in mind. 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, or investment strategy. Options carry a high level of risk and are not suitable for all investors. While this webcast discusses technical analysis, other approaches, including fundamental analysis, may assert very different views.
Short options can be assigned at any time up to expiration, regardless of the in-the-money amount. And any investment decision you make in your self-directed account is solely your responsibility. OK, so if you didn't see the first eight lessons, here's where we've been. We've gone through the first eight lessons. First four were dedicated to learning the basic building blocks upon which all options strategies are built or constructed. So building blocks one through four, long calls, long puts, short calls, short puts. Then we went through the options pricing and Greeks. Then we started getting into building combination strategies in lesson six, seven, and eight. That brings us to lesson nine, a bullish strategy known as a short put spread, also known as a short put vertical or short put vertical spread.
We have multiple names for the same strategy. But we're going to be talking about that strategy today. Combining really two put options. So here's the agenda to get that accomplished. We're going to talk about the what's and the why's of short put verticals. What are they? Why do some traders turn to them at times when they think the markets or stocks might be bullish? We'll discuss the basic construction, the basic elements of short put verticals. Talk about when a trader might choose to enter them, when they might choose to manage the trade or exit. And of course, we're going to place at least one example trade before we're done today. So really, let's get right into this, really looking forward to it. Let's go right to the thinkorswim desktop platform.
And I just want to start off with an example. This is going to be the one that we're building our example short put spread on. We're using Medtronic. Now, before we launch into the discussion of the strategy, let's talk about or just revisit the sorts of characteristics in a stock that a trader might consider for qualifying a stock as a potential candidate for doing a short put spread. So as we've discussed over and over again, this is like our eighth strategy that we've learned in this lesson series. Well, for each one, for each of our options strategies, there are some elements that a trader might consider. Number one is the kind of company behind the stock. So for bullish strategies, and this is a bullish strategy, maybe the trader is looking for companies that appear to be healthy from a financial perspective.
Maybe their earnings are growing, maybe their revenues are growing, maybe their outlook for the future is strong as far as profits and sales are concerned. However, the trader wants to qualify that fundamental health. Some traders take that in consideration. Not everybody does, though. But another consideration potentially is the price per share and liquidity of the stock. High-priced stocks can offer more options that can be nice for building the strategy, but also the hot, those higher-priced stocks carry larger potential obligations, especially when we're doing these short option strategies. Illiquid stocks tend to have illiquid options, low-volume stocks. If the stock isn't trading heavily, its options almost always are not trading heavily either, and that can lead to pricing issues for the would-be trader.
So for some, a real point of emphasis is millions and millions of shares being traded on the stock. So hopefully the options are as liquid as they could be. All right. So those are some considerations. How healthy is the company? What's the price per share? How's liquidity? But also for some, they look at the chart. So let's talk about the chart of Medtronic here for just a moment. And this is a bullish strategy. So maybe hopefully the trader is seeing something bullish. Now, you might look at Medtronic and say, Cameron, it's down 1% today. Yes, but what's been going on recently that might catch the attention of a bullish stock chartist? Well, just yesterday, Medtronic had a strong day that actually took it up into territory that traders have not seen on this stock, actually, not just in weeks or in months, but in years; there was an apparent price ceiling about here to around 92 and a half.
You can see that over the last five months, stocks tried to get above that level on a number of occasions. But actually, if we stretch this chart out, let's look at a three-year chart. You can see that's actually been the case. Going all the way back to where we spent just a few weeks above 92 and a half all the way back in 2022. So we may be seeing what we might call a breakout just from yesterday. So let's say that our trader is thinking, oh, we just cleared an apparently important price barrier. And maybe the stock is going up from here, at least for a while. So let's turn our attention to this timeframe. March 21st.
We're going to be planning an example to trade today for March 21st on the assumption that maybe our trader thinks that the stock is at least going to stay above that $92. 50 barrier that it just broke. So how might a trader benefit potentially from that? Well, first thing they might do is if the stock, if they really think the stock is likely to be bullish, could buy a call. As we discussed in Lesson One, buying a call is a bullish strategy. Or maybe they sell a put. But. To start off our example trade today, let's say that our trader is considering selling a put at that 92 level right about there, and let's do that for the March 21st expiration.
In this case, they'd be entering into a contract through March 21st where they're accepting a payment from another trader out there in the trading universe. And in exchange for that payment, they have an obligation where the other trader has the right to sell shares to to our hypothetical trader for $92 per share. Now, as long as the stock is above 92, it's unlikely that they'll ever be required to buy the $92. And if we're still above 92 by March 21st, then the highly probable outcome in that scenario is the contract just expires worthless, unassigned, and the trader keeps the money that was paid for that $92 obligation. So let's go have a look at this. Let's go to the trade tab and we're going to start to build our example trade.
Because this example trade does begin with conceptually a short put selling a put. So this is called a short put spread. So as the first leg of the first side of this trade, let's look at maybe that $92 put for the 21st of March. Now, I kind of cheated. I went to the trade tab. I already had the 21st of March open. So let me close that up again so you can see how I found this trade tab. Make sure they have the right symbol and then we'll click on the 21st of March. And as we go down the list of available strikes, let's maybe look to strike a deal to possibly exchange shares of Medtronic at $92 per share. It looks like that's trading between $114 and $122.
If we split the difference, maybe our trader here can sell this put, sell the 21st of March, $92 put. Maybe we can get $1. 18 for that. So just to revisit this trade, if we just did this, this all by itself would be a bullish strategy. We discussed this strategy explicitly in lesson four in this series. So if you need to go back and catch up on that, go to lesson four. Matter of fact, let me hit the pause button here. I'll show you where that lesson four is found. If you want to find these lessons, first of all, make sure you're subscribed to our YouTube channel. You can go down and click on the subscribe button below the video right now. If you haven't done that already, just click on subscribe.
But our YouTube channel, called Trader Talks Schwab Coaching Webcasts, is where we house previous webcasts, and you can find those here under our playlist. Now, you can also join live streams there, but I'm going to go to the playlists and I'm going to scroll down. Almost all the way to the bottom. And actually, you might be thinking you're looking for my face because I teach this webcast series. Actually, previously last year, Barb was teaching this webcast series. So you're going to see Barb's face here. But right there it says getting started with options. If I click on View the full playlist, though, you can see there are the other eight lessons. All right. So in lesson four, we talked about short puts.
So if you want to go back and learn just the basic elements of this side of the strategy, you can do that. But let's go back to Thinkorswim and talk through this obligation again. What is what is this contract we're conceptually entering into here? Well, if we're able to sell this put for one eighteen, that's that is we're collecting a premium of a dollar and eighteen cents per share. Somebody conceivably here paying us, paying us a dollar eighteen per share for the right to sell us one hundred shares of stock. So a dollar eighteen per share. That's one hundred and eighteen dollars that we're getting paid. But in exchange, through the 21st of March, the other party in this transaction has the right to sell shares or put shares to us for ninety two dollars.
So we now know for the next 21, for the next 17 days, until the 21st of March, we might have to cough up ninety two bucks per share. Now, there is a risk in that. Let's say we just did that. I'm going to click on this on the bid price to create a sell order for just the short put. So there we are, we're going to sell one of these contracts, just as an example, the ninety-two dollar put, maybe we get the dollar eighteen. It looks like that price is falling a little bit. Let's just leave it there. That's OK. I'm just going to click confirm and send. But what I want to point out here is the amount of profit. My, you know what?
Just so we keep the numbers consistent, I said a buck eighteen. Let's say we're going to require one eighteen may not fill for that price. That's OK. But just so that we can see the actual numbers here, if we're able to sell this for one eighteen, there's one hundred eighteen dollars on the table for us. We might make a maximum profit of one hundred eighteen dollars. Now, here's where some traders pump the brakes. Whoa. What's the loss potential on this trade? Nine thousand and eighty two dollars. Ouch. Yeah, big downside risk on this trade. That's because we know for the next 17 days we might have to buy shares for ninety two dollars per share. We have no idea at that point, now that we're the proud owners of the shares, how much we'd be able to sell those shares for.
All we know is how much we have to buy them for. So if the stock has collapsed in value, the further down it goes, the more this stings to have to buy the shares at ninety-two dollars. If we have if we have to then maybe have to sell them at ninety or eighty-five or eighty or seventy-five, the further the stock goes, the bigger the risk here. And that stock can go all the way to zero. And if we lose ninety-two hundred dollars on the stock. And we only have one hundred and eighteen dollars in consolation prize from the premium that we collected, that's a nine thousand eight hundred and two dollar risk. That's where that risk comes from. Plus throw on a little commission here.
So, for some traders, they're going to have to wait a little bit longer to see if they're going to be able to sell the shares. They get the concept here and they also might say to themselves, 'Yeah, but what are the odds that Medtronic literally goes to zero in the next 17 days? Doesn't sound likely. It's not likely.' Still within their own possibility. But the inherent risks of this, number one, there's a huge dollar risk. So we have to be aware of that. We have no defined price at which we can sell the shares if we get stuck with those shares at ninety-two dollars; and therefore there's a large cash requirement when selling a cash-secured put. We'd have to have the ninety thousand or nine thousand and sixty-eight dollars.
What was it? Nine thousand. I'm going to have to click confirm again, confirm and send again. Nine thousand eighty-two. It's just ninety-two hundred minus our one eighteen. Anyway. Yeah, we'd have to have that much. Tied up in cash, especially if we're directing this into an IRA or a cash account. So. How do we address those issues that some traders might take issue with? Well, at the same time, we sell a short put. We're also going to buy a long put. We're going to buy in this case. Let's just delete this. Come down here, go back to our option chain. And let's buy another put that's less expensive than our than our put that we sold. So, in this case, how about we do just for nice round numbers, let's just go two dollars.
How about we go to the ninety-two? Let's buy the March. Buy the ninety put. Let's buy the March ninety put. How much is that trading for? That looks like that's trading between sixty-two and seventy-seven. Let's split the difference. Let's call it sixty-six cents. So what does this add to the equation? Because there's a there's a cost associated with this. We're taking some of the one hundred eighteen dollars that we just collected and we're going to spend it in a spend that we're going to spend sixty-six cents of that. But here's what that does for us. We know when we sold the ninety-two dollar put, we have the obligation potentially to have to buy shares at ninety-two dollars. And we had this kind of scary scenario where we didn't know how much we could sell the shares for.
Well, if we own a put that has the same number of days on the same underlying stock. We now have a defined contractually guaranteed ability to sell the shares at a specified price. So for the next seventeen days, if we get I'm going to use the phrase if we get stuck with the shares, because actually getting those shares is not the design of this trade, it's not the preferred outcome of this trade. But if we get stuck with the shares at ninety-two, at least we now know even if they fall down to ten bucks a share. We can sell those shares for ninety dollars. We've just dramatically whacked that risk, that downside risk. It was over nine thousand dollars of risk.
And for the cost of sixty-six cents per share or sixty-six dollars, we reduce that nine-thousand-dollar risk to two dollars per share. If we have to buy shares at ninety-two, sell shares at ninety, that would be a two-dollar risk. Let's do some math here. What is the theoretical max loss of this trade? If we get assigned and have to buy the shares at ninety-two, but we can also exercise our contract, sell those same shares that we don't want for ninety dollars, that would be a two-dollar loss, but it's not even a two-dollar loss because. We collected a credit to set this trade up and that would still be in the portfolio in this outcome. So what's our difference there? That looks like about fifty-two cents. Call me out if I'm wrong.
I do the math in my head. Sometimes I blow it. So let me know if I did this wrong. But we have a net credit of fifty-two cents. Again, here's the math: One. Eighteen collected minus sixty-six cents spent. Fifty-two cents. So if we apply that against our two-dollar loss on our stock, that would leave us with a dollar forty-eight that could be lost on this trade and that becomes the maximum theoretical risk. So instead of being over ninety dollars per share of risk, we spent sixty-six cents to limit that risk to just a buck forty-eight. So for some traders, they consider this a very much worth the investment. That's just an accepted cost of doing these sorts of trades. Doesn't mean everybody's going to choose to do it this way.
But in this example, this is going to be our short put spread. So why do we call it a short put spread? Well, short is a term that we use in trading whenever we sell something to initiate a trade. So in this case, we're selling a put to get into a trade. So we're short that put. We're also constructing the trade using puts. And there is a spread between the two prices. There's a two dollar difference or a spread. Ninety-two up here, ninety dollars down there, a two dollar spread. And as we discussed in in lessons six, seven and eight, that spread is vertically oriented. Ninety-two is vertical. It's above ninety. So this is a short put vertical spread. That's where the terminology comes from, at least the way that I think about it.
So this is our maximum theoretical loss on our trade. How much can we make on this trade? Well, if we collected a dollar eighteen spent sixty six, that leaves us with that credit of fifty two cents, that's actually the most we could make on this trade. Our theoretical max game is the one eighteen minus the sixty six cents spent. That's fifty two cents. Now, any time I'm talking in cents or pennies or, you know, it just doesn't sound like a lot, but actually this is a considerably high potential rate of return on the amount of money that we have tied up in this trade, because in our portfolio, if I built this trade just like this, let's let's go ahead and do this.
So if you want to see how to enter the trade and I don't, I don't typically do the trade this early in a webcast, but we've been through a few other similar strategies already. I'm going to go ahead and place this trade. So here's a quick way to enter the order on thinkorswim. We can go to the option that we're considering selling. In this case, that's the ninety-two. And we click on the bid price and that creates a sell order. Now we can go back up to the option chain. Let me just minimize our this is not going to delete the order. It's just going to hide it down at the bottom of the screen. If I click on the down arrow, that just minimizes it. Go back to the option chain.
I'm going to hold down the control key on my keyboard and then click on the ask price for the option that I intend to buy, so that's the ninety dollars. I'm going to click on that ask price and that creates our vertical spread. Right now it looks like that might be fifty one cents. I'm going to do this, let's say. I'm going to do a little bit of rounding. Let's say and who knows where the actual numbers actually pan out if the order fills. Let's say that we're able to sell. The put sell the ninety two for a buck twenty, but we have to spend seventy cents. On the ninety whatever, but in any case, let's say that the difference turns out to be fifty cents instead of fifty two.
So we only get to keep a fifty cent credit. And and so our. Our risk reward scenario changes a little bit, I'm just going to use nice round numbers. It just I think it just makes everything easier for those trying to follow along. So if we have two dollars that we could lose, but fifty cents has been collected, that leaves us with a dollar fifty risk. And if we collect a dollar twenty. And spend seventy cents, that leaves us with a net credit of fifty cents. Right. But in any case, I did all of that so that I can do this. Let's just assume a credit of fifty cents. Well, well, if we're left with a dollar fifty per share or on one pairing of contracts into a vertical spread, dollar fifty times one hundred shares, that's one hundred and fifty dollars of potential risk.
Now the trader can start to build that assumption into how many contracts they get themselves into. So if we could lose one hundred fifty bucks on one vertical spread, what if we did ten vertical spreads, that would be a fifteen hundred dollar risk. Actually, for this one, I'm going to do exactly that. Let's dial this up to ten. All right. But let's click confirm and send. We're going to enter this as a limit order. Selling ten of these ninety to ninety put spreads, trying to get at least fifty cents when we put in a limit order, that means, hey, that's the least I'm willing to accept. That's my limit. I'm not going to accept forty-nine cents and forty-eight cents. If we're able to fill for that, that would give us a minimum maximum profit.
Funny way to put it, but depends on where we fill. Let's say we fill at fifty cents. That would give us a maximum profit of five hundred dollars on ten contracts. That would give us a maximum loss of fifteen hundred dollars on ten contracts. Multiple contracts mean multiple commissions. So there would be a thirteen dollar net commission here. So bringing our credit, if we're able to fill for five hundred bucks, brings it down to four eighty seven. But let's send this off. Let's see if we can get this filled. Let me go to my monitor tab. When we place a trade, we can go to the monitor tab. Oh, look at that. Look at that. We sold it for fifty cents. Nice. So all of this lines up beautifully.
So what have we just gotten ourselves into? We are now into a we're into two different contracts. We may have to buy a thousand shares of stock at ninety-two bucks per share, but we know if we need to, we can sell that same thousand shares of stock for ninety bucks, worst-case scenario. So let's play those scenarios out on our chart here. So we already have a line drawn in at ninety-two to represent this option that we're selling. Let's draw in another line at ninety dollars. As a matter of fact, let me move this one over just a little bit. I'm going to position it under today's candle. That just indicates to me it's just a visual reference point to tell me that's when I started the trade. You don't have to do this.
This is really just more of a teaching thing than anything else. Okay, but let me draw in another line at the ninety-dollar level as closely as I can. So those represent our two strikes. Now, this is a bullish strategy. Just remember, this is a bullish strategy. The trader here prefers for the stock to go up. Or for it to at least not go down too much. Because if we if we're above ninety-two, let's walk through what could happen with this trade from here through the next seventeen days. If we're above ninety-three or ninety-four, let's just say ninety-five. And someone has the right to sell shares to us for ninety-two dollars. Do they have much motivation to do that? Shares are worth ninety-five.
I think I say, Cameron, I can sell my shares on the open market for ninety-five, but I'm going to do, I'm going to sell it to you for ninety-two just because I can. No, that doesn't make any mathematical sense. Now, every once in a while, somebody gets a wild hair and does exactly that, but. Not likely. All right. So they're going to say, forget it. They've run out of time. The shares are worth more than what they think they can sell them to me for or to to our trader here for. So they walk away from a deal. They're done. So we keep the buck twenty. Awesome. But at the same time, we spent seventy cents for the right to sell shares to somebody else for ninety bucks.
Well, ninety is all the way down here. Do we or does our trader here have motivation to sell shares that are worth ninety five to someone else all the way down at ninety? No, that is now a sunk cost. It expires worthless. So in that case, we lose the seventy cents. We keep and realize the gain on the buck twenty. There's no further obligation there. And that results in our fifty cent maximum gain. Fifty dollars. Now, realized on five contracts, that's a five on ten contracts. That would be our five hundred dollar profit. So really anywhere up here is where we'd like to be. Yes, for the next 17 days, but also especially as we hit that.
That March twenty first threshold, so even if we came down for a while, but then went back up as long as the contract long as the short contract was not assigned before then. We could still be in position for maximum gain. So this is a bullish strategy. We want this as the outcome. Well, what if the opposite happens? What if this stock that's been going up so rapidly, even though it cleared that apparent important price hurdle? What if it decides to go right back down again? I don't want to draw it. Let me let me remove this drawing. Switch this over here. Let's see. Let's say our share value collapses down here to eighty eighty eight bucks. Steep sell off. Could it happen? Yep, it could happen.
If the shares are worth eighty eight and someone has the right to sell shares to us for ninety two, are they going to do it? Yes, with with very rare exceptions. They say, Cameron, hey, my shares are only worth eighty eight, but my contract says I can sell them to you for ninety two. So they sell us those shares. Stuck with shares at ninety two. What are we going to do? Sell them? Sell them to somebody else for ninety. We didn't want to do that. That's a two dollar loss, but that's better than being stuck with shares at eighty eight. So that's a two dollar loss for which we originally collected a 50 cent credit. We still have the 50 cents. So that leaves us with the dollar fifty loss if we fall down here. So down here becomes our maximum loss territory. This is not where we want to go. It's not where we want to go. OK, so let's make that red.
Well, there's one other place we could wind up. We could wind up above ninety two, we can wind up below ninety or we can wind up in between; look at me drawing another rectangle, I don't need a rectangle. Let me remove that drawing, switch back here to my trend line tool. And let's suppose instead price falls and it winds up somewhere in between our hour strikes, this is where things get particularly sticky. Got to be aware of this because this is a possible outcome, not a probable outcome. It's only a small possibility. But it is, it is a possibility. What if our stock falls down here to, let's say, ninety one dollars? Well, that means we're below our maximum gain scenario. We're above our maximum loss scenario. So somewhere in the middle.
Well, if we're at ninety one dollars and someone has the right to sell shares to us for ninety two, are they going to do it? Yeah, they're going to do it. They have the right to sell shares for us to us for ninety two. Can't get that price anywhere else, so they do it, they assign the contract, we wind up buying the shares, we now own a thousand shares of Medtronic. OK, what do we do with those thousand shares? You might think, oh, let's just dump them, let's exercise our contract to sell those at ninety bucks. We don't want to do that. Our trader does not want to do that. If the shares are worth ninety one, even though our contract says we can sell them for ninety, we don't want to.
That would be if we sell them for ninety, that'd be selling at a one dollar discount on a thousand shares, that'd be a thousand dollar mathematical error. Instead, what might we do? Just sell the shares on the open market. Our contract turns out we don't do anything with this. So in that case, how did we do? Well, we bought the shares for ninety-two. We sold them for ninety-one. That's a thousand dollars. It's a one-dollar loss per share on a thousand shares. Sounds like a huge, scary deal to wind up with a thousand shares of stock. What it actually turns out to be is a one-thousand dollar loss on the stock. But we did get the fifty-cent credit on the options. Those options contracts are now done. So we have the fifty-cent credit.
We have the fifty-cent gain on the options. So really, overall, we lost fifty cents and that's narrow. With this trade, a quick way to calculate like the break even point on vertical spreads is to figure out where we need to be. In this case, we need to be above ninety-two dollars for maximum theoretical gain and then just subtract how much we can make on the trade from that area. So in this case, it's a bullish spread. We'd like to be above ninety-two to make our maximum gain. That means if we're below ninety-two to some extent, we must not be making maximum gain. For every penny that we're below ninety-two at expiration, we're coming up a penny short of our maximum gain. So if we are fifty cents below ninety two at expiration, that's our break-even point.
If if this were a bearish trade and we've got a couple of bearish strategies, let's say it had a fifty cent potential maximum gain, it would be fifty cents above the low strike where we need to be to be in our position for maximum gain. That's it. Let me see what questions have come in. Mark says, 'Sell the shares directly, don't exercise a lower price, but yeah, Mark, you know, I think it just makes sense when we first learn about these strategies, we know, OK, it's a covered position, we have the right to sell our shares for ninety bucks just because we have the right, though, doesn't mean that we always want to do that, that's sort of the that's sort of the worst case scenario emergency outlet for this trade to stem the bleeding.
What we don't want to do is add to the bleeding by exercising our right here. Kurt says, 'what about early assignment? The stock price could rise.' That's exactly right. What if all this happened not at expiration? What if we drop down to ninety one dollars and somebody decided, you know, I'm not going to wait until expiration. I'm selling these shares to Cameron for ninety two right now. Shares are worth ninety one. We still have the right to sell at ninety if we need to, but still some time. So in that case, maybe the trader just well, there are a number of things they could do, they could just say, I didn't want to be in this situation. Let me sell the shares.
Let me sell my put for what I can I can get for it and just be done. Or they might wait to see, like Kurt is proposing. If the stock goes up and we own a thousand shares, it will wait it out. Just be aware that's a ninety-two-thousand-dollar investment that we're holding on to for a while. But let's talk about. We've talked about how this trade can pan out. Let's hit on a couple of things. When might these trades be taken? When might they be exited? We've actually started hinting at exits. But what are some potential entry signals for these? Well, we've talked about one, a breakout where we have a price ceiling and we push up through that to some technical traders that that might mean the stock is about to go for a nice run and that can be an entry.
But alternately, maybe a trader isn't looking for something that's been going up to generate a signal, but actually something's been going down to generate a signal in the spirit of maybe entering low and exiting high. Buy low, sell high, they say. So let's look at example like, how about Amgen? Amgen is it's kind of for those that are watching this later. Today's a rough day on the markets, yet there are still some stocks that are doing OK with Amgen. It's been running up and pulling back and running up and pulling back. And for some traders, they look for this sort of a thing where prices run down and then start to bounce higher. We've talked about bounces before, but when stocks pull back, some traders will look to that as a potential entry.
And specifically for some, they'll look to see which day got the lowest. And in this case, this was our lowest day. And then if prices can just rally above that lowest day, closing above the high point of that low day, that might be their entry. That might mean that in the short term, the momentum has returned to the bullishness of the stock. And you can see that despite today's red candle, we're trading above the high of that low day. That may be an entry known as a bounce or cahold entry, close above the high of the low day cahold. All right, so that's another reason for some, they may take a bullish strategy approach like a bull put spread. Now, there can be there are literally hundreds of other potential entries using technical indicators, using candlesticks.
That's going to be up to the individual trader. But I wanted to give a couple of examples for this discussion. So for entry, there are a couple of examples. What about managing the exits? Well, there are a few potential exits, some management techniques for when a trade is going well, other management techniques for when a trade is not going so well. So let's go back to our MDT position. We actually have this trade going on right now. Well, let's assume the stock does what we hope it does. And it just keeps going higher. Well, in that case, the trader might just hold on and let this, let these contracts just expire worthless and realize the maximum gain that way. Keep the credit. If the stock is going up here, the assignment risk is lower.
Just wait for expiration. Now, as we discussed with our short call spread, well, maybe the trader doesn't need the full gain. Maybe if they can get out just with most of that gain, they're going to be able to get the full gain. So how about for this one? We've already collected a 50 cent credit. What if we were able to buy out of this contract and just be done for 10 cents? Well, that would leave us with a 40 cent realized gain. That's 80 percent of the 50 cents that we collected. How about we do that? Let's go back to our position. Here's our MDT position right down here. Let's see how much we filled these. Look at this. They actually, they're trading it again. That's exactly the mark that I put up.
That's that's kind of funny. Anyway, I'm going to right click on this existing position. This is how we can enter a closing transaction after we're already in a trade. We go to the monitor tab, right click on our symbol and create a closing order for those verticals, buying 10 verticals. Now, notice to buy out right now, it's pretty much what I sold those for. I don't want to sell to get into the trade for 50 cents and then buy it to get out of the trade for $0.50. Let's say we want to do this for $0. 10. There we go. And let's make that a good till canceled order. So what we're telling the system now is, hey, any time between now and the 21st of March, if I can buy out of this deal for $0.
10, get me out. Maybe it's tomorrow. That's not likely, but it's possible. Maybe it's a couple of days before expiration. But at any point, if I can get out inexpensively, in this case, 20 percent of the original premium collected is being spent. Let's click confirm and send. Now, not everybody is going to be set it at like 20 percent of the original premium, it might be $0. 50, who knows, or 50 percent. But let's let's place this order. If this one fails, there is a commission to be paid again. That would increase the cost to exit. But let's send this order off. All right. So that's another potential exit strategy. That's if the thing is going well, if the stock is going up, maybe we let it expire.
If it's if it's cooperating, it's going up, getting closer to expiration. Maybe we can buy out inexpensively. Or what if the stock starts to collapse? It starts to go down into the spread. It starts to go down into max loss territory. In that circumstance. Maybe the trader decides to pay what it takes to get out. And it might be more than 50 cents. Now, if we're dealing with good liquid options, there should be a good chance that we're able to get out. This is another thing you might think, what do you mean, Cameron? A good chance? Well, sometimes if the options are illiquid. It might have to pay up to get an order filled on these things, so that's why it's so important with with options traders, the liquidity of the option.
Is it a big deal trading, trading options on stocks that trade millions and millions and millions of shares can help with that liquidity in any case. Yeah, if the stock starts to fall down in this case, it might be if it breaks down below that price ceiling that we thought might be a new price floor, especially as we get closer to expiration. Maybe the trader considers buying out of some or all of those positions, even if it costs a dollar; 50 shouldn't cost more than two because that's the maximum theoretical loss on this trade. OK, but guys. With that, though, we've actually placed our entry, we placed our exit. We've actually accomplished all that we set out to do today.
When when I kicked things off, we wanted to talk about what short put verticals are, why some traders might take those positions, we've talked through the basics of short put verticals, how much they can make, how much they can lose, assignment risk considerations. We've discussed potential entry signals, trade management techniques and exit signals. And we've even placed our example trades. So we now have quite a few strategies that we might choose from long calls, long puts, short calls, short puts, long call spreads, short call spreads, long put spreads, short put spreads, so many choices. How does a trader pick just one? That's what we're talking about next week. Lesson 10 is going to be about choosing a specific strategy based on one's outlook for the markets and also based on one's risk appetite.
That's another important element. So make sure that you're here for Lesson 10. Again, if you didn't catch the first eight lessons, those are found. Let me just show you where to find those. Those are on our Trader Talk Schwab Coaching Webcast channel on YouTube. So if you haven't subscribed to our channel yet, go down, click on the subscribe button down below the video. But our channel is where we host these playlists of previous webcasts. You can join the live streams here just to revisit where we found this playlist. You click on Playlist, scroll all the way down and look for Barb over here on the right. There's Getting Started with Options. Barb, because she taught this webcast series last year. If I click on View Full Playlist right there, there are lessons one through eight.
How about I do this for those that are in the live stream audience? I also have the link here. Let me just copy this link and give it to you in the chat window. There you go. Alright, but guys, I will see you in Lesson 10. If you haven't followed Connie and me on X yet, and if you have an X account, please do that, follow your favorite presenters on X. It's the best place to connect with them in between the live streams. And it's also where you can get sort of more current insights into market developments, things like that. So, yeah, follow us on X. You can find Connie there at Connie Hill CS. You can follow me on X at Cameron May CS. Thank you to everybody that's already clicked the like button.
I can see 132 people watching right now. Forty-eight people have already clicked the like button. If you appreciate the efforts of your of your presenter, if you enjoyed a webcast, make sure that you always click that like button. It only takes a second. Everything that I've just proposed, none of it costs anything. It's just subscribing, following, liking. But it's all, I think, assists with your learning experience. It helps when you like a webcast. It also gives that webcast a boost in the YouTube algorithm and lets more people find these lessons and learn from them. So that's definitely appreciated. Everybody, I'll look for you in a future webcast. I'll also look for you on X. But until that moment arrives, I want to wish you the very best of luck. Happy trading. Bye bye.
