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. And specifically, this is Lesson 6 in our intended series of 10 lessons that are devised just to bring along somebody who's brand new to options trading straight through that world of options trading, getting them comfortable with planning and placing options trades and specifically using the Thinkorswim desktop software platform as we do it. So Lessons one through five, we've gone through the basic building blocks of all option strategies. Last week, we talked about the terminology related to options as far as the Greeks and the pricing of options is concerned. And today in lesson six, we're going to be talking about using that knowledge of the basic strategies to combine options into different kind of fancier strategies.
And the one that we're going to start off with today is called a long call spread. It should be a really good discussion. It should be a really good discussion. It should be a really good discussion. I'm really looking forward to it. I am very aware that we have lots and lots, hundreds of new people watching today. If you haven't seen lessons one through five, that's totally fine. I'll show you where you can find them. And I'll try to go at a pace that everybody can follow, even if we're picking up right here in the middle of the series. So great to see everybody. I'll set an agenda for exactly how we're going to accomplish today's discussion in just a moment. Let me first of all, say hello to everybody out there on YouTube.
Great to see Teddy and Eva, DT, Damply, Douche, Sasha or Shashi. Eric, Sandra, James, Chris, Wes, Scott, Tamika. On and on that list goes. Thanks, everybody, for being here. We really appreciate your attendance and your contributions to these discussions. If you are among those who are here for the very first time, I do want to welcome you as well. And if you're watching on the YouTube archive after the fact, because these sessions are archived, enjoy the presentation. Be aware that you're invited to join us in a live discussion. This is a Tuesday live webcast series. It kicks off promptly at noon Eastern. We'd love to have you here in the live stream audience. I also want to let everybody know that we have my very good friend Connie Hill hanging out in the chats with us.
Connie's going to be helping me with any questions that I can't get to. With the number of people that we have watching live, over 1,700 people right now, there are going to be questions that I can't get to. Connie's going to pick up as many of those as she can. As long as they're on topic and they contribute to the general discussion, that's fabulous. All right. And Connie and I would also like to issue an invitation to all of you, especially those of you with an account on X. Make a note of this. You can follow your favorite presenters on X. You can follow Connie there at ConnieHillCS. You can follow me on X at CameronMayCS. And that's the very best place to connect with your favorite presenters when there isn't a live stream going on.
And for me, that's only about four hours, five hours a week where I'm actually live streaming. The rest of the time, the best place to connect with me is there on X. So do give a follow. It doesn't cost anything to do that, which is great. But let's get right into lesson six here. As we do, of course, we need to very first pause to consider the risks associated with investing. Certainly applies to options trading. These are important disclosures. Bear them in mind. Options carry a high level risk and are not suitable for all investors. The information here is for general informational purposes only. It should not be considered an individualized recommendation or endorsement of any particular security, chart pattern, or investment strategy.
Schwab does not recommend the use of technical analysis as a sole means of investment research. And investing involves risks, including the loss of principle. All right. So let's set an agenda. Well, let's actually quickly revisit where we've been in the series, and then we'll set an agenda for the day. So here's our series overview. If you weren't here for the rest of the series, lessons one through four were about learning the basic building blocks from which all option strategies are constructed. In the whole world of options trading, there are two types of options. There are calls and there are puts. And you can do two things with them at their most basic level. You can buy them and you can sell them. So we went through buying calls and puts, selling calls and puts in those building block discussions. How the trader might benefit from those approaches, how they might experience risk. And we placed example trades along the way. Then in last week's discussion, we talked through the general pricing of options.
Now, we're going to get into those sorts of what we might call the fancier option trades. We're going to start taking calls and puts and combining them together, building combination strategies, starting with the one that I think most people relate to most readily straight out of the gates. It's known as a long call spread. Also commonly known as a long call vertical spread. I'll talk about that terminology as well. But it's a long call spread. We're going to get into that as we go. But then we're going to just move on with the rest of the series, building other combination strategies. And finally, we're going to wrap up in lesson 10 with how do we choose among all these strategies that we've covered. So that's the overview for the series.
Here's what we're doing today. Today, we're talking about long call spreads, also known as long call verticals. So we're going to talk about what are they and why do some traders use them? We're going to go through the basics of how they're constructed, discuss when they might be entered, when they might be exited, how they might be managed along the way. And of course, we're going to include an example trade in the discussion. All of this is going to be done using the Thinkorswim desktop trading software platform. A bit of a mouthful, but let's go right to our learning. So, I want to kick things off just with an example trade right out of the gates. We're going to be using Bristol Myers Squibb as our example trade.
But before we do that, I do want to mention one last time that we are using some trading software here that's known as Thinkorswim, specifically called Thinkorswim desktop. And it can be downloaded for no cost right from within your Schwab online account. So let me show you where that download is found. I know there are lots of people here who haven't seen this before. So if we go to our online account for Schwab and we pop up here to the trade tab, we can download Thinkorswim desktop right there under trading platform. Doesn't cost anything to download. There's no subscription fee or anything like that. And when we click on that Thinkorswim desktop, right there is the download. Learn how to enable Thinkorswim. It'll walk you through the whole process.
Then once we've downloaded the software, it'll create an icon on your computer's desktop. It looks kind of like a little green or blue splash. And you just click on that, log in using your Schwab credentials, no new credentials required. And that will have you here on the Thinkorswim trading software platform. So let's get into this strategy, this thing that we call a long call spread. And it is a bullish option strategy. It's a trade that's typically placed when a trader thinks that prices are likely to go up. So in that spirit, let's look at Bristol-Myers Squibb. And of course, naturally, people are going to ask themselves, Cameron, how did you choose Bristol-Myers Squibb? What are some of the characteristics of a stock that a trader might look for?
And of course, it's a trade that's likely to go up. So let's look at Bristol-Myers Squibb. And of course, naturally, people are going to place an option strategy like a long call spread. Well, some of the pre-qualifiers, we've discussed these in lessons one through five. We've hit on them multiple times. But some of the characteristics might be, number one, price. Higher priced stocks typically have higher priced options and larger risks and obligations. Lower priced stocks, lower priced options, smaller risks and obligations. But each level can have its appeal to its own audience. So price can be a consideration. Also, the liquidity of the stock. Illiquid stocks tend to have illiquid options. That can lead to issues with the pricing, making them harder to trade profitably.
So some traders will really put an emphasis on the price per share, but also the liquidity of the stock. A third potential consideration is what's happening on the chart. For those that use charts for the planning of a trade, they may be looking for some signal from price that at least in their view, price is more likely to go up for bullish strategies or down for bearish strategies. And we're talking about bullish strategies today. So here's Bristol-Myers Squibb, one of the largest companies in the world. It's a $56 stock right now. Highly liquid stock. But also, if we look at its chart, here's one thing that some technical traders may note. Is that over the course of the first seven months of this last 12-month period, the stock really struggled to get above about $55.
You can see that price rose up that level and just got pushed back. It rose up to that level and then pushed back. And finally, for about a week here, we started crossing back and forth through that $55 level where it seemed like traders just couldn't make up their mind. And then, boy, it seems like there was a definitive decision made here and price, up, and since then has kind of refused to go back down below 55. So let's just say for the sake of this example discussion that our trader thinks at least we're not likely to go down below 55 and let's say they have their eye out on let's say the March options. This red line just represents the 21st of March, That's where the traditional third Friday option expiration cycle was.
So let's say our trader is looking out there to plan and place a trade for March and they just want to know or at least they just want to feel that price seems more likely to go up than down. So whether price actually does or not, let's say that it's our trader's conviction that price is likely to rise from here off of this $55 level. Well, what we're going to do today is build a trade that will benefit as long as we actually just are above 55 as we cross that $25 level. So let's say our trader is looking out there to plan and place a trade for March and they just want to know or at least they just want to feel that price seems more likely to go up than the 21st of March threshold.
So let me draw in a couple of lines here. This is just going to represent our trade and I'll explain it in greater detail as we go. But basically, we're going to build a trade consisting of two positions. One at the $55 level right here and the other one we're going to put down here at the $52. 50 level right there. And that trade is going to terminate. It's going to be a long call. So here's going to be our trade. Now if we're bullish on a stock, just to revisit lesson one, we talked about long calls. In other words, long just means buying calls. If we buy a call, the trader's expectation is that price goes up and that they might be able to benefit from that price move.
So I'm going to come over here and let's map out our example trade today. Okay. Example trade for the day is going to be known as a long call. Spread. Let's make this bold so it's just a little bit easier for everybody to see. But the building blocks of a long call spread are from lessons one and three, where we talked about buying calls and also selling calls. So let's go to our trade tab. I'm going to stay with Bristol Myers with BMY. Let's go out here to the 21st of March. We'll talk about choosing different potential expirations a little bit later. But for now, let's just say we're going to go out here and we're going to say the 21st of March. And we're going to start to build this call spread.
First thing I'm going to do is I'm going to look down this column, this strikes column, prices at which we can strike a deal to maybe exchange shares of stock with another trader out there. And I'm going to use as our first example, the $52.50 call. And specifically, we're going to buy the 21st of March $52. 50 call. And that looks like that's trading for between right now, between $4. 15 and $4. 25. These are live quotes. They'll change as we're talking. But let's say we're able to buy that for $4. 20. What we already know from lesson one is that if we bought that call, we're giving ourselves for the next 38 days or through the 21st of March, 2025, the right to buy, the contractual right to buy 100 shares of Bristol Myers.
For in this case, $52. 50 per share. So specifically, we're spending $4. 20 per share on 100 shares, that's $420. And in exchange for the next 38 days, hey, if the stock goes rocketing up, we now have the contractual locked-in right to buy shares for not a penny more than $52. 50. So if the stock goes up to $60 or $70, or $70, or $70, or $70, or $70, or $70, or $70, or $70, or $70, or $70, or $70, or $70, or $80, probably not likely to do that in that timeframe. But we do know that for those 38 days, doesn't matter how high the stock goes, we have the right to buy it at $52.
50. As a matter of fact, it's already at 56. So already, we have a little bit of what we call intrinsic value in this contract. So this is a trade that could just work just based on this one technical setup, as long as the stock goes up fast enough and far enough, good return for our trader. But there are some potential cons. There obviously, that sounds great. If the stock goes up, we could make a lot of money because we've locked in the purchase price of the stock for 38 days. But there are some things working against this trade right from day one. Number one is the cost of the trade. Now we have to spend $420 just to get this thing working.
So there's a significant expense and that cost, represents the amount that can be lost on this trade. $420, okay, that's not nothing, that's certainly a consideration. Another thing is, if the stock isn't going anywhere for the next 38 days, we have a contract that just doesn't do us any good. Right now, we do have the right to buy the shares at about basically a $3. 50 discount. Sounds great, except we paid $4. 20 for that discount. Yeah, we need that discount. We need that discount. We need that discount. We need that discount to grow. We need the stock to go up. So because of those elements, because of the cost and the need for the price to go in a specific direction, inherently, this is actually a lower probability trade.
When we're buying options, it's a low probability scenario because of what we call the time decay. If you need to see more discussion on time decay, you can go back to Lesson Five, we talked about that. And that cost can just be whittled away by time. So how can we potentially address both of those problems and even change this from a low probability trade to a high probability trade? Well, let's do that. So here's the other side of our spread trade. It begins conceptually with buying a call. We're in familiar territory. It also includes selling a credit, which should also be familiar territory if you watched Lesson Three. So we're going to stick with the same expiration and we're going to sell 21st of March, but a different strike price.
We're going to sell the $55 call. And that looks like that's trading for about somewhere between $2. 33 and $2. 38 right now. Let's call it $2. 35. Let's say we're able to sell that for $2. 35. All right. So we've already talked about when we buy a call, we have the right to buy shares for a fixed price for a fixed period of time. When we sell a call, we have the obligation to sell shares for a fixed price for a fixed period of time. So what does this do for the trader? Here's the bottom line deal when we're doing a spread trade. And I know when we first do one of these, you know, when we first learn about options in the first place, it's kind of tough to wrap our minds around the contracts that we're getting into.
How much can we make? How much can we lose? How does price change along the way during the frame of the trade? There's a lot to keep in mind there. That's why we make these videos and we record them. So let me point something out here. Let me do this. First of all, if you want to see lessons one through five and be prepared to watch lessons seven through 10, and then we're going to keep going after that. We're just going to keep trading different strategies and exploring them in detail. We have a YouTube playlist. I'm going to copy and paste that playlist link into the chat window right now. Okay, so this would take you to the chat window right now. So this would take you directly to the other lessons.
There you go. There's our YouTube playlist. But also if you're watching on the archive, you didn't get to see the chat that I just sent out. You can find our playlist for our previous webcasts. If you go to YouTube and look for these keywords, Trader Talks, Schwab Coaching Webcasts. Schwab. And I'm doing coaching right now. So we have this channel called basically Trader Talks is what we'll typically call it. But just make sure that you've subscribed to this channel. And if you haven't subscribed to this channel, this is where we host our playlist. You can find them right here. You can also join all of our live streams. And we have six, seven, eight of them every single market day. You can join those live streams right here.
But let me just quickly click on the playlists. And if you wanted to find just through a manual process, instead of using a link that I just provided, you can just go to our playlist and scroll down, look for my, actually, I think it's Barb. But if you scroll down, you're going to look for Getting Started With Options. That's the link. The series, and you can view the full playlist right here. And you can see within that playlist Lesson One, Lesson Two, Three, Four, Five-all right! So let's go back to now that we know how to find that but the the bottom line here is: make sure whether you're watching live or you're watching on archive, go right down below the window, below the video window, right now.
Click on that subscribe button, it literally only takes a second-it doesn't cost anything, it subscribes you to the channel. Then you can find those playlists and join the live sessions very quickly. But back to our trade: when we buy a call, we have the right to buy shares for $52. 50 and a half for $50. To fifty and for that, we spent four dollars and twenty cents per share. Now, at the same time, to create this vertical spread, we're going to enter into a second contract. We have one contract giving us the right to buy shares; we're going to get into another contract giving us the obligation to maybe have to sell shares. Let me ask you: if we have a contract to buy shares, do you think we want to get into a contract to have to sell shares that sell those same shares at a higher price than we buy them or at a lower price than we buy them?
Yeah, we're going to do that at a higher price. So this second contract obligates us at any time at another trader's Discretion, we have to sell shares to them for fifty-five dollars per share. Hey, that's no skin off my back as long as I have the right to buy those shares a lower price which I have, yeah, so in this case we're taking on that obligation to maybe have to sell the shares at a higher price and for that obligation we're getting paid two dollars and thirty-five cents. So it reduces the net cost of the trade. Let's do some of the math on this spread. And as I do this, let's talk about the language of this trade. So, it's commonly known as a long call vertical spread.
Long means net, we're buying something, did we pay more money or did we receive? More money? Well, we paid four dollars and twenty cents. Received 235 net. This is a debit transaction, net. We'd call it a purchase. And when we purchase something in the trading world, we say we're going long. So it is a long trade constructed using calls, a long call, and then it's also known as a vertical spread. Here's where those terms come from. There's a spread in the in the price uh in the contractual prices: fifty-two and a half dollars versus fifty-five dollars. Right, so two and a half dollar wide spread that's the language that we would use. And if you think you know fifty-two dollars is lower than fifty-five dollars, there's a vertical Spread between those two prices that's that's it that's how fancy this is that's it all right so that's the strategy, those are the the rights and obligations, okay.
So let's talk a little bit about the cost, how much we can make, how much we can lose, what are the probabilities of those scenarios, what can happen at expiration if we just let the whole thing go to the end, okay. So what's the net cost, our net debit that's what we'll call it because it's going to be a debit also this is going to be the theoretical maximum loss of the trade because it's how much we're investing or risking in this trade is four dollars and fifty-five. Dollars twenty cents that we're spending, but we're collecting $235. The difference between those two, according to my math, is a dollar eighty-five. So out of pocket, a dollar eighty-five does that make sense? And if we're spending that, that's how much we can lose.
I'll explain why in just a moment. How much can we make in this trade? Well, there's some, there's some there's some a fairly straightforward equation that we need to learn that can tell us how much we can lose and how much we can lose and how much we can actually profit on the trade. The theoretical maximum gain on this trade, we take the spread of 52 and a half and 55 so what is that, that's two dollars. and 50 cents and we subtract the cost of the trade dollar 85 so that leaves us with 65 cents that can be made and some of you just sucked in your breath and you're like oh my god i'm going to lose a lot of money i'm going to lose a lot of money
and said oh my goodness cameron what so if i do this trade i can make 65 cents or on 100 chairs 65 dollars i can lose a dollar 85 that's three times as much that i can make as i can lose yeah and for some traders they're totally happy with that trade-off it and that has to do with the probabilities but here's what i want to walk through how did i come up with the 185 and the 65 i kind of just sort of brushed Through and said, that's the way it is, I don't want you to take my word for it, that's the way it is. There's definite logic to this. Let's go back to our charts and we have our green line and our well, our upper green line, our lower green line.
Notice this top one is at 55 dollars and this bottom one I drew in at 52 and a half dollars, so there are certainly some logic in where I drew those. And let's just suppose the stock goes up as our trader expected all right, let's suppose it, whether it goes to 56, 57, 58, 59, 60 doesn't matter. Let's use a nice round number, let's say it goes up to 60 by March 21st. If if I have the right because here's the basic Building blocks of this trade are these two things, right here. We have the right to buy shares at 52 and a half; someone else has the right to buy those shares from us at $55.
So if a stock is let's say up at 60 dollars at expiration date, and if it's expiration maybe I'll move my line just so you can see that it makes it a little bit easier to sort of envision what we're talking about here. If the stock's way up there at 60 and we have the right to buy shares at 52 and a half, and time is up; we need to make up our minds-it's March 21st. Put ourselves in the shoes of of the trader who has this position at expiration; they have a contract that says Cameron You can buy a 60-stock for 52 and a half dollars. Is Cameron gonna do that? Yup, obviously I'm putting myself in the shoes of the hypothetical trader here.
But yeah, we buy those shares at 52 and a half when we got a big discount on the shares. However, hit the pause button for just a moment there's someone else in the equation here; someone else has the right to buy shares from us for $55. The shares are worth $60. Are they gonna do that? Yeah, with very rare exceptions, we would call both of these contracts in the money at expiration. In other words, they're giving the the the contract owner the right to buy shares for less than the shares are Worth on the market, so yeah, those contracts. If you're if you're wondering, every in-the-money contract is automatically exercised at expiration if the if the owner didn't choose to do it already. If it's still in the money at expiration, it's automatically exercised.
Yep, our trade will automatically be exercised at 52 and a half. We buy the shares at 52 and a half, the other one automatically exercised or assigned in our case from our perspective, it's assigned, but which just means 'Hey Cameron, I'm assigning my right to buy shares from you' and uh, we sell the shares for $55. So let's do the math on that, and then I'm gonna really I'm gonna emphasize something just I saw here in the chats, I'll talk about it in just a second, but if we buy shares at 52 and a half, we buy the shares at 52 and a half, and we buy the shares at 52 and a half, and sell those at 55, that would be a two and a half dollar profit, awesome!
But that would be if the trade were free to set this up; it wasn't free to set this trade up, it actually cost us a net dollar 85 to set the trade up, so we have to subtract the cost of the trade from the profit on this on the purchase and sale of the stock, and that gives us our net return, our maximum gain scenario on this trade. So does this make sense? I'm going to go ahead and do that and i'm going to go ahead and do that and i'm going to go ahead and do that and i'm going to go ahead and do that and asad says is it is it possible
for me to replay this since the beginning yes this webcast is being recorded long as i don't screw something up dramatically and create a technical glitch that prevents it from getting to the youtube channel yeah it'll be posted to the youtube channel not too long after the webcast is completed typically within a few hours could be just early the next day something like that but yep you can go back and re-watch this so that's the most we can make that's the most we can theoretically How do we lose a trade that's the most we can theoretically lose? How do we lose a trade that's the most we can, we need to reverse the assumptions of the trade here.
Okay, Vino Vino says, 'Why wouldn't you just buy at 52 and a half and sell at 60?' Good question, the problem is we're in a contract that requires that we sell at 55. That's why could we choose to buy out of that contract, yeah, and if we have a good liquid stock, uh, good liquid options, and we just we want to be out of this deal; I don't want to have to sell at 55 anymore. Well, they're not going to let us off the hook easy; someone else has the right to buy shares at a five-dollar discount. We're going to have to pay them at least five dollars to get out of that deal which is going to be a lot more than they paid us in the first place, so yeah.
If we're dealing with good liquidity contracts, um, could we buy it out? Yes, but there are pros and cons to that. Typically, the trader is in this for both sides until they choose to exit. But let's talk about what if the stock goes down? What if it collapses? We didn't think it would. What if it did? What if it dropped down here? Oops, I'm drawing a channel. I don't need another channel. I need another line. Let me just remove this drawing. Let me switch up my drawing tool to just the trend line tool and what Happens if we drop down below our two verticals or pardon me, our two contracts. Let's say we go down here to $50. Um, so if the stock's down here at 50 and we have the right to buy shares for $52.
5 do we want to overpay for those shares just because we're not going to be able to buy shares for $52. 5? Our contract says we can nope. We say, you know what guess I guess. I just lost my 420 investment because I've run out of time. My contract's offering me no benefit over just going and buying the shares on the open market and I lose my $420. Well, at the same time someone else has the right to buy shares from us for $55. Are only worth $50, are they likely they can't if they get if they get a wild hair and they want to overpay for those shares, yeah they might it's just not very likely at all okay we would say that both of these contracts in that case are out of the money at expiration and in that case we say I'm not going to buy the shares, they're not worth $52.
50 or the other person says I'm not going to buy the shares, they're not worth 55 so we lost our 420 we keep the 235 from the other trader but the net is we get to the end no shares are exchanged we just lost our net 185 so that would be the loss scenario, so then it just seems like well, so I can only make 65 cents i can only lose 185 that's true but which one of those scenarios do you think is a much higher probability outcome than the other one let's talk about probabilities for just a moment in order for this trade to work really we just need to be above 55 at expiration point guess where we already are without the stock having to lift a finger yep long the stock goes up even if it goes sideways or down as long as it's above 55 this is the likely outcome um another great question karen says
oh never mind never mind sorry yep i think there's just a sidebar discussion going on there anyway um yeah the stock doesn't have to Do anything to produce a max gain scenario, all it has to do is sort of avoid going down too far and that's why the trader might go to some effort to determine which way they think the price is headed, doesn't mean they're right but in this case, the stock hasn't even been below 55 for any appreciable period of time for the last several months and if it can just be there again on March 21st we're in position for max gain scenario. What's the likelihood that we're going to be down below 52 and a half at expiration well the stock's got some distance to travel just to get there and it doesn't have a whole lot of time to do that so max loss.
Is actually a low-probability scenario. Max gain is a high-probability scenario, and we can actually see those probabilities if we just go to our trade tab I'm going to go to the trade tab and include it in this tab if we go right up here so we talked through this in our initial lessons especially in lesson five where we talked about what are called the options greeks we talked about delta, gamma, theta, vega, and rho. Okay but delta among other applications delta can tell us how much we might make or lose on an option on a one dollar move on the stock but another way that delta might be used is it can tell us the relative likelihood that An option is in the money at expiration, here's another example of an option that's in the money at expiration, here's another example of an option.
A way to say that if I look at my 55 strike, because really we just want to be above this, is a bullish strategy I'm going to emphasize that by putting that word on the screen. This is a bullish strategy; we would prefer for the stock to be above our vertical spread at expiration, in other words, be above 55 at expiration. If we look at our delta delta of 62, might be interpreted by some as there's a probability that we're going to be above our vertical spread at expiration, approximately a 62 chance that the stock is going to be above 55 at expiration, that makes sense because it's already above 55 even if it goes down there's still a good there's still a small probability it doesn't go down below 55 so it's better than 50/ 50 that we're above 55 at expiration but specifically it's around the 60-61-62 percent mark, that's the probability of maximum gain on this trade if we just put the trade in and let it run to expiration.
What's the probability of maximum loss? Well in that case we need the stock to fall down below 52. 5 and according to our delta again, if we look at 52. 5 there's a 78 percent chance that we're at least above 52. 5 at expiration or in other words, there's only a 22 percent chance that we're below and we and we encounter a max loss so bottom line math here. Let me give myself just a little bit more space. There's about a 61, 62% probability of maximum gain at expiration. There's about a 22% chance of maximum. I'm going to have to reverse those. Let me write those in the right spot so that you're not absolutely aghast at this trade. There we go.
Let's change this one to 22. There we go. All right. This is why for some traders, they're totally fine. Yeah, I'm willing to risk $ 85 because there's not a lot of chance that I'll lose that in an effort to make 65 cents, because there's a stronger probability that's exactly what's going to happen. Now, if I do this, I'm going to have to do this. I'm going to have to do this. I'm going to have to do the math here though. I'm going to add 62 to 22. And by my math, that's $84. So there's only an 80% chance that we either make maximum gain or we make maximum loss. Where'd the other 16% go? Well, here's something else we didn't consider on our chart.
What if the stock goes down from here, but not down below $52. 50? What might happen here? Well, let's talk through our trade again. If the stock, let's say we're at $54 at expiration, not above 55, not at max gain. Matter of fact, to help us visualize this, let me draw in a box here. You know, I like my boxes, my colored boxes. I'm going to draw a box up here because this is where we want to be. There's our green box. This is our max theoretical gain territory. Down here is where we don't want to be. Let's put in a red box down here. This is where we don't want to go. Let me edit the properties of that box. I'm going to change its color. There we go.
Click OK. That's where we don't want to go. Well, what if we're in between max gain and max loss? Well, it means just what you think it means. It means we're not all the way up to maximum gain. We're not all the way down to maximum loss. So we either have some gain or some loss. But here's explicitly what may happen at expiration. We definitely want to be aware of this. If we're at $54 and we have the right to buy shares for 52 and a half, are we going to do that? We're still able to buy the stock at a discount. Yeah. Our contract says we can buy the stock at a lower price. Great. We buy the shares at 52 and a half.
Someone else has the right to overpay us for shares. They're only worth 54. Someone else has the right to buy them for 55. Are they going to do it? Nope. They're going to walk away. Cameron, keep your shares. So great. We now own a $54 stock. We paid 52 and a half for it. Awesome. We made $1. 50 in unrealized gain on the stock. But net, we paid $1. 85 for that deal. In that scenario, we now own shares at a little bit of a discount. But it cost us more for the discount than the actual discount delivered in value. We paid $1. 85 for a $1. 50 discount in this scenario. So in that case, we'd be $0. 35 unprofitable at that point.
Just be aware, if we allow this trade to get to expiration while we're in between the two strikes, the most likely outcome, with rare exceptions, is our contract gets automatically assigned at expiration. And we buy the shares at 52 and a half. The other party walks away and says, Cameron, keep your shares. And then it's just up to, well, are the shares worth at least $1. 85 more than what we had to pay for them at 52 and a half in order for this trade to just be above water? That's it. So those are the potential outcomes at expiration. So when might a trader get into these sorts of trades? And when might they actually choose to get out before expiration? A couple of reasons.
These are definitely not the only reasons a trader, might take a trade. First reason might be because they think stock, the stock has come down to a price floor and they think it's bouncing higher. We just call it a bounce. When price is coming down to a price floor that we've identified, starting to bounce higher. And how might we define a bounce? Well, maybe it could be as simple as seeing price come down to a price floor and then we get a nice white candle down near that floor, meaning that prices are starting to move above that day's open. That's one reason a trader might take a bullish trade like this. A second reason might be the trader sees something like, uh, let's see. I think I saw something on McDonald's that was interesting.
Yeah. This is what we call a breakout where instead of looking at a price floor and trying to get in down close to that, maybe a trader is looking for a price ceiling, also known as resistance. And if prices have pushed through a recent ceiling, that may to some technically signal that price is going to go down. And that's a break out where instead of looking at a price are set to go higher from here, and that might spur them to put on a bullish trade such as a long call spread. Now, those are just a couple of examples of potential entries. They're not exhaustive by any means. Obviously, the study of charts is a whole field unto itself known as technical analysis.
And if you want to learn more about that, we have webcasts on our calendar that can help you learn about that. But that's a couple of potential entries. The one that we used was the bounce for BMY. When might a trader exit? Well, let's go back to BMY. And we've already talked about how things might work out as we start to get toward expiration. If the stock is going up, maybe the trader just waits and waits and waits. And at expiration, the shares are automatically bought on their behalf. The shares are automatically sold on their behalf. And it just realizes the theoretical maximum gain. With BMY, the stock is going up. And if the stock is going up, maybe the trader just waits and waits very rare exceptions.
So they may choose to do nothing. That's their exit. If the stock starts to slip down, though, and especially if the reason for getting in starts to reverse, so if our bounce fails and we start to break below that price floor, or if our breakout fails and we start to fall below the price ceiling, the trader might take a good hard look at exiting. So, let's say at some point on our way to expiration, the stock is already falling down to 54 or 53, but solidly below our floor, the trader might want to go put in a closing trade to get out. And that would very likely be at an unprofitable cost. Not maximum loss, but working its way there, possibly. Now, there's a third possible exit.
And that is sometimes on its way to expiration. So let's say that we're at an unprofitable cost. And we're at an unprofitable cost. And some of our more veteran attendees here can attest to this. Sometimes the stock just does exactly what we think it's going to do. And it starts rocketing up. So, let's say the stock is just blasting off. What that can do is it can start to race our trade scenario right close to the most we can make. We know that we can only make $0. 65 out of this trade. Or in other words, if we paid $1. 85 to get into, maybe we can sell it for close to $2. 50 and we're not anywhere close to expiration. In that scenario, the trader might choose to just get out.
You know, if we're, let's say the trader notices, hey, I can sell this vertical spread. I bought it for $1. 85. I can sell it for $2. 30 or $2. 40 already. They might just choose to get out. But there are a few scenarios that we can use to get out. So let's say we're at an unprofitable cost. For when a trader might choose to exit, just wait till expiration, maybe get out if the trade is breaking down, or maybe get out quickly if the stock is really being cooperative. But I'm going to go place this trade right now. Here's how we might place a trade. Here's a quick way to do it. I know that we wanted to buy the $52.
50 call for the 21st of March and sell the $55. I'm going to click on the $52. 50 under the ask price to create a buy order. Okay. And actually, let me hide this left column. So here's our buy order. I'm going to hide that buy order. Now I want to add the sell order to it. I'm going to hold down the control key on my keyboard and click on the bid price of the option that I intend to sell the $55 call. So there's our trade. Now for each one of these, if we know that we can make, let's say what it looks like, it might cost us a little bit more. Let's dial this up to maybe, $1. 90.
Prices have changed since we started talking, but that's $190 of risk. And the trader just needs to calculate how many contracts they're comfortable buying at that point. I'll just do one contract for this example, but let's go ahead and submit this order. I'm going to put in a limit order for $1. 90, click confirm and send. And we're going to buy that one vertical spread for up to $1. 90 leaving, in this case, $0. 60. $2. 50 minus $1. 90 is $0. 60. As our possible gain, $60 profit potential, $190 loss potential. There is a commission, it's $0. 65 per contract times two contracts. And I'm going to send that order off. There we go. All right.
Well, guys, we've actually, with that, accomplished what I set out to do today. When we kicked things off, we wanted to define what a long call vertical spread is. We've gone through some important considerations, some key numbers. We've talked about basic stock selection, option selection, entry and exit considerations. And we've even placed an example long call vertical spread trade. So I hope this has been helpful to you. I actually just heard in my ear, the little bell that tells me that that order just filled. So from here, we'll see if we can stay above 55, that's as we're hoping for now. What we're going to be doing in future weeks, here's how we're going to round out our series. We're going to move on to building what's known as a long put spread in Lesson 7.
I hope you'll join me next week for that discussion. And then we'll finish out the series. And beyond that, we're going to keep doing webcasts. And in those webcasts, we're going to trade these strategies, managing them along the way and getting deeper into them. So I hope you'll continue to follow me here. But guys, time for me to let you go. But as I do, I want to reemphasize, you have some important resources available to you. First of all, make sure if you haven't done so already, that you subscribe to our Trader Talks channel. You can go down and click on the subscribe button right now. It doesn't cost anything. It literally only takes a second. But that channel is where you can find the playlist of our previous webcasts, including this one.
You can also join our live streams right here. Also, make sure that you're following Connie Hill and me on X. You can find Connie there at Connie Hill CS. You can find me on X. If you have an X account, follow me at Cameron May CS. You can find me on Twitter as well. I also want to say there is a survey that's been added to the chat window. Connie's reposted it a couple of times. Thank you, Connie. If you do it one more time, that'd be fabulous. But everybody, we have really short surveys, two multiple choice questions and a comments box and a suggestion box. If you fill it out, I'll take the time to read that survey. Finally, thank you to everybody for clicking the like button. A like always helps. It sounds like applause and it gives a boost to the webcast in the YouTube algorithm. But everybody, time for me to let you go. I'll see you next time. I'll see you next week for Lesson 7. I'll see you in my other webcast series. Between now and then, I'll also look for you on X. But whenever I see you again, until that moment arrives, I want to wish you the very best of luck. Happy trading. Bye-bye.
