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. We are in Lesson 4 in an intended series of 10 and in the first 3 lessons we tackled the first 3 of 4 basic building blocks upon which all option strategies are built. In Lesson 1 we talked about buying calls, Lesson 2 is buying puts, Lesson 3 is selling calls. And today we're getting into selling puts, the fourth and final building block. So this has been a large accomplishment for those that are new to options trading. We've made some big strides toward really understanding the world of trading options. We're going to be talking about selling puts, pros and cons, what are the motivations, and how might it be done using the Thinkorswim platform to place trades.
We're going to be doing all of that today. Before we can get to any of it though, let me first of all say hello to you. Everybody that's already chatting out there in YouTube land, hello there. Manisha Ricebird, Sharon, Will, Leon, Jim E., Randy, Life in the Fast Lane, Eva, Jules, Ray, Kevin, Jack, everybody else. Thanks for joining us week after week. We really do appreciate your attendance and your contributions in these discussions. If you are here for the very first time or if this is your first video that you're watching, welcome. It's great to have you on board. And if you're watching these presentations on the YouTube archives, enjoy the show. Watching the archives is fabulous, but also be aware that you're invited to join us in the live discussions if you like to be here.
This is a Tuesday webcast series. It kicks off promptly at noon Eastern time. We'd love to have you here. Anyway, let's get into this. As we do, the first thing I would like to do is issue an invitation to you to follow me on X. You can follow me there at CameronMayCS. I should also point out, I missed this. I'm being joined here in the live stream by my very good friend, Connie Hill. She's going to be hanging out with the chat audience. She's going to be answering any questions that I can't get to. Thanks for having my back there, Connie. You can follow Connie on X as well at ConnieHillCS. But X is the very, very best place to connect with your favorite presenters in between the live streams.
So let's get into this. First thing that we need to do, as we always do, is pause to consider the risks associated with trading and investing. These risks are real, so do 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, or investment strategy. The cash-secured put strategy risks purchasing the corresponding stock at the strike price when the market price of the stock will likely be lower. Investing involves risks, including loss of principle. 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.
Okay, so quickly, let's revisit where we've been and where we're headed in this series of lessons. Lesson one, as I mentioned, was that building block number one, long calls. Then we moved on to building block number two, long puts. Building block number three was short calls. And here we find ourselves building block number four, short puts. Then next week, you'll make sure you don't want to miss this one. We're going to get into options pricing and Greeks, which may not sound terribly exciting. Maybe a little bit exotic. But options pricing is key to understand when one is attempting to trade options. Understanding how prices are currently determined, determining what I'm paying for or what I'm receiving as a premium is important. But also understanding what might influence the changing of those options prices in the future.
When we're buying stocks, it's a little bit of a luxury to just know, oh, I bought it $100. It went to $110. Great, that's a profit. Unrealized until I sell it. But with options, there are multiple variables that can change whether a trade is profitable or unprofitable. It's not just the value of what the stock does after we enter into an option on that stock. So make sure you're here for lesson five. But what are we doing for lesson four? Here's the agenda. We're going to be talking about short puts. Also, sometimes, depending on circumstances, referred to as cash secured puts. I'll explain. That terminology as we go through this discussion. But we're going to be talking about why and what is a cash secured put, what is a short put, why might a trader want to do that.
We're going to walk through the basics of selling cash secured or short puts. We're going to place an example trade using a thinkorswim platform, and we're going to do that right away. And then we're going to prepare ourselves for our next discussion, next steps to keep learning. Cynthia says, are all the previous lessons. Are they recorded? They are, Cynthia. Yep, you can go watch them right after this webcast is over. You can find those on our Trader Talks channel on YouTube. I'll make sure to show you where to find that. Okay. So let's get right into selling puts. And to set the discussions for today, the example for today, we're going to be using Walmart. So what do you notice about Walmart as we look at just the chart of the stock?
Well, it's been a great run for Walmart for this year. It's been running up and up and up and up and up. The stock recently, it moved into what we call a price channel, going sideways for a couple of months. But now it seems to be pushing up through a recent price ceiling, possibly ready to move again. And some of you who just learned about options or maybe you're more veteran might look at this and say, oh, that looks bullish. Maybe a trader might buy a call under these circumstances. That's one basic bullish approach to trading options. A second basic bullish approach is selling a put. So, buy a call. It's a bullish strategy. Selling a put is a bullish strategy. So let's go.
I'm going to go place the trade right now, and then we'll talk about what in the world we just got ourselves into. So I'm going to go to Walmart. And how about for today's example, let's go to the 21st of February. Let me close this up so you can see the whole chain. I know that some of you are just getting used to letting your eyes sort of settle on this options chain. So, again, we're on the Thinkorswim desktop trading software platform. That can be downloaded for no charge just from within your Schwab online account. You go right to the trade tab and you'll see Thinkorswim there. But you download this. You log in using your Schwab credentials and you'll see just what I'm seeing here. And we're going to go to the trade tab, enter our symbol here. And down below are going to be what we call the options chain. And I'm going to go to the 21st of February. These are contracts expiring in 24 days representing 100 shares.
And I'm going to click on the 21st of February and I'm going to go down looking at the strike prices. We are going to be striking a deal with another trader out there and today's deal we're going to go for the $95 strike for the 21st of February and we're going to sell a put, so here's the example trade. A short put, also known as selling a put. So if we sell the $95 put, that's going to be the 21st of February- $ 95 put, that looks like it's trading for between 164 and $169. Let's not be too generous here; I like to use the nice round numbers just to keep the focus on the learning. Let's say that we get a dollar 65 by selling this put.
And I'm going to do that right now, so how do we sell a put? Well, we go to the option chain, we find the put that we're interested in, we go to the bid price and when we want to buy something, we'll typically go to ask price. Hey, how much you asking for that? Okay, I'll pay your buy price; I'm buying! If we want to sell something, hey, how much will somebody bid me for this, and then you sell to the highest bidder. We're going to sell at the bid price. I'm going to click on that and that creates an order to sell. Right down there now, give me just a moment here to hide this left column so we can see the whole sell bar here; the order bar.
And by default, my thinkorswim is set up to bring up an order to sell one contract the minus one here yours might be 10, so keep an eye out for that. I'm just going to use one as today's example: selling one 21st of February $95 put on Walmart right now; I sell a put. Right down there now give me just a moment here to hide this left column so we can see the whole sell bar here the order bar and by default my thinkorswim is set up to bring up an order to sell one contract the minus one here yours might be 10 so keep an eye out for that I'm just going to use one as today's example selling one 21st of February $95 put on Walmart right now I sell a put.
Right down there now give me just a moment here to hide this left column so we can see the whole sell bar here the order bar and by default my thinkorswim is set up to bring up an order to sell one contract the minus one here yours might be 10 so keep an eye out for that I'm just going to use one as today's example selling one 21st of February $95 put on Walmart right now I sell a put. Right down there now, give me just a moment here to hide this left column so we can see the whole sell bar, and by default my thinkorswim is set up to bring up an order to sell one contract; the minus one here, yours might be 10, so keep an eye out for that. I'm just going to use one as today's example selling one 21st of February $95 put on Walmart, right now I sell a put.
Right down there now give me just a moment here to hide this left column so we can see the whole sell bar here the order bar and by default my thinkorswim is set up to bring up an order to sell one contract the minus one here yours might be 10 so keep an eye out for that I'm just going to use one as today's example selling one 21st of February $95 put on Walmart right now I sell a put. Right down there now give me just a moment here to hide this left column so we can see the whole sell bar here the order bar and by default my thinkorswim is set up to bring up an order to sell one contract the minus one here yours might be 10 so keep an eye out for that I'm just going to use one 21st of February $95 put on Walmart right now I sell a put.
Right down there now give me just a moment here to hide this left column so we can see the whole sell bar here the order bar and by default my thinkorswim is set up to bring up an order to sell one contract the minus one here yours might be 10 so keep an eye out for that I'm just going to use one 21st of February $95 put on Walmart right now I sell a put. Right down there now give me just a moment here to hide this one here yours might be 10 so keep an eye out for that I'm just going to use one 21st of February $95 put on Walmart right now I sell one 21st of February $95 put on Walmart right now I sell a put.
Right down there now give me just a moment here to hide this one here yours might be 10 so keep an eye out for that I'm just going to use one 21st of February $95 put on Walmart right now I sell a put. Right to sell shares to us. Let's move this line down. Let's activate this drawing. I'm going to drag that down to $95. That's just to sort of represent our obligation. Someone has the right to sell shares to us for $95. The first thing you'll notice is that, hey, that's below the current price. Yeah. If the stock stays where it is, or if it goes higher, if it goes up from here, if it goes sideways from here, or even if it goes down from here, but we're above $95, what is the owner of this put that we just sold likely to do?
Oh, Squackity, let me just read your question here for just a second. So when you pick the strike price, are you guessing where the lowest price would be between now and the expiration date? It's a good question. I will talk a little bit more about which strike price. Notice mine was, did it feel a little bit random? Cameron, why'd you do $95? There are pros and cons to different strike prices. We'll talk about that in just a moment. But let's say the stock goes up to $100, maybe goes sideways and it's still around $98-ish, or maybe it falls down to $96, but it's still in all three of those scenarios above $95 by February 21st. Before or on that date, the other party has a decision to make.
Hey, do I really want to sell my shares to Cameron? Do I really want to sell my shares to Cameron? Do I really want to sell my shares to Cameron? Want to put these shares to Cameron. Well, if they're worth 96 or 98 or $100, there's not much motivation for that other trader to say, you know what, Cameron, you can have my shares at a discount just out of goodness of my heart. No, most likely scenario there is at expiration, the other party here just says, 'Hey, Cameron, keep my $1. 62, I'm keeping the shares.' And that becomes a realized gain at expiration. Might not feel like a lot. $1. 62, does that seem like a lot? Well, $1. 62 on a $95 obligation is better than 1.
5% in 24 days. So it's not nothing. It's actually a fairly high potential rate of return, but it does have that obligation that the trader has to be comfortable with. And that is the primary motivation for lots of traders out there; they just like to collect that premium. And then if they get the direction of the stock right, maybe the contract just expires worthless and they keep the $1. 62. Well, that's if the stock goes up. What if it goes down below 95 to 94, 93, 90? If it goes down here, I'm just going to use an extreme example as well. Let's put it down here at 80. Could it get down to 85 by the 21st? I don't know. I don't know. I don't know. I don't know.
I don't know. I don't know. I don't know. I don't know. I don't know. I don't know. I don't know. I don't know. I don't of February. Yeah, it could. It's not likely, but it could. If the stock drops below 95 and we hit that expiration, the other trader has to make up their mind. And by the way, they could do this at any time. But by February 21st, they have to have made an ultimate decision. Am I going to sell my shares to Cameron in this scenario or not? Well, if the shares are only worth 94 or 90 or 85, they have a strong motivation to assign that, contract to sell those shares to us. So if we're required to buy the shares at 95, when they're down at 94 or 92 or 90, that can sting a little bit.
However, this actually may still be the intended outcome for some traders. What they might be doing here, let me just clean up my chart for just a moment. Let me just clear off the whole drawing set. I mentioned that there are two primary motivations. There's the income, but there's also the potential for ownership. Let's put ourselves in the shoes of a trader who sees Walmart right now. And they think, you know what, I wouldn't mind adding Walmart to my portfolio sometime in the next little while. I'm just not really thrilled with maybe buying where it might be a possible high. I'd prefer to buy at a lower price. And while I'm waiting for that lower price, maybe I could arrange for somebody to pay me to buy at a lower price.
That's the concept of this deal. Collecting this premium, hoping for the price to drop, and then we get assigned at a lower price. Sure. If we get assigned at 95 while the stock is at 94 or 93 or 92, are we at that moment paying a higher price for it? Yep, we are. But we're paying less than we would have had we just bought the stock up here at the peak, plus we collected $1.62 premium. So for some traders, this is actually a strategy that's employed, not just to collect the income, but as a potential entry into a stock. If they get assigned, they do this on a stock that they're totally fine with owning. And as a matter of fact, that may have been their primary motivation in doing this trade in the first place.
But the bottom line here is, if we're selling puts, we're taking upon ourselves the contractual obligation to buy shares for a fixed, at a fixed price that's entirely at the other party's discretion. So we have to be comfortable with the potential for ownership. So are we all clear then on what the motivations are for why some people do puts, selling short puts? Are we all so comfortable with the obligation associated with that step that we've taken, and with just the contractual obligation? Well, let's take a look at the contractual terms of the deal. That's it. Yeah. So this is looking very much like the contracts that we've already acquainted ourselves with in lessons one, two, and three. So let's really start to get a little bit deeper into the numbers.
Let's talk about what is the ultimate risk of this trade? Bruce says, buying a put? How does that work? So Bruce, we actually talked about buying puts in lesson two. You may want to go back and revisit that if you haven't already. So let's talk about that. So, let's talk about that. So, let's talk about that. We haven't seen the whole series, but today we're talking about taking the other side of that transaction, the motivations of the seller of the put. With all options contracts, we have buyers and we have sellers. And there's the potential for profit, also the potential for loss for either party. So let's do the not so fun stuff for just a moment. How much is the most that a trader could lose if we decide to do this trade?
So let's do the not so fun stuff for just a moment. How much is the most that a trader could lose if we decide to do this trade? So let's do the not so fun stuff for just a moment. How much is the most that a trader could lose if we decide to do this trade? Maybe try, you know, buy out of the put? And we might do that at a higher price than we originally were paid. That can result in a loss. But nobody can twist our arm and make us do that. Yeah, that once it's collected, it's up to us to decide what to do with that money. But what's not up to us is this obligation that's attached to the deal. It's a contract. It's a contractual obligation.
So if we are obligated to buy for $95 through the 21st of February, here's the risk. What if the stock does this? Let's go crazy. What if it does that? Is Walmart going to drop down to $65 in the next 24 days? That is highly unlikely. But if we're in a contract that says we have to buy it for 95 and it collapses, that's a risk. And then the other trader might say, 'I'm not even waiting until the 21st of February. I'm selling this thing to Cameron and then we're buying up here at 95 and we have a huge built-in loss in the stock. So is this a strategy that one would want to employ on a stock where we really were iffy about its near-term future? Probably not.
Instead, a little bit of a blip downward might not be too bad of a deal. Or if we flip down to 94 and then we have to buy at 95, that might be okay. Traders buying the shares, adding some diversification to their portfolio, they got paid $1. 62 along the way. That's great. But this is a risk that we have to be familiar with. How much is actually the most we could lose? Well, if we're required to buy at 95 and the stock falls way down to zero, we now own a worthless stock for $95. That's a $95 loss minus the $1. 62 that we got as a tiny consolation prize. And with this, what is the maximum theoretical, let's phrase it this way, the theoretical maximum loss here?
Well, it'd be if we got assigned the shares at 95 bucks, but we did get $1.62. 62 that was collected up front, that would leave us with a maximum loss of $93. 38. I did that math in my head, but you may have noticed as we were placing the trade, I jotted this down. It said that our maximum loss was $9,340. Yep. Yeah. So that can be terrifying as a new seller of puts. But let's put that in realistic terms. What would have to happen in order for us to actually lose $9,300 on this trade? Walmart, one of the biggest companies in the world, would have to go to zero value in the next 24, 24 days. Is that likely?
Extremely unlikely, but it's still a little fact of this trade that we have to be aware of. Little facts, big fact. How much is the most the trader can make on this trade? It's actually just the amount that was collected. Because if the stock goes up, if the stock goes up, the other trader might say, Cameron, I'm going to hang on my shares. You keep my $ 62 and the deal's over. On day 24, time, it's up and it's now just a realized gain. In comparison to the maximum loss, this seems minuscule, but actually the probabilities of this happening greatly outstrip the probabilities of this ever happening. But we do need to just be aware of those sorts of things. So we've talked about the risk.
The risk is there's limited upside and there's the risk of assignment. We might have to buy the stock at a price that's low. We're going to have to buy the stock at a price that's low, lower than the price at which, at the time at which we're required to buy. The reward is the premium. We might also be able to buy the stock at a lower price than if we just bought it on day one. And if we don't have to buy the stock, well, the trader might just do it again the next month. Just repeat this process. Glenn says, so can the buyer exercise their rights anytime before expiry or do they have to wait until the 21st of February? Good question, Glenn.
They can do it at any time for any reason, no matter where the price is. As long as the price is above 95, there is a lower probability of that happening. The further we fall below 95, the higher the probability goes that the owner of the put is gonna require the seller of the put to buy their shares from them. But really, it could happen at any time. I will say that it's less likely, how do I wanna phrase this? Most contracts are not assigned before expiration, whether they're what we call in the money or out of the money. Greg is asking about something called the wheel strategy. We're not gonna get into wheel strategy today, Greg, which is actually a concept of selling a put, seeing if we get assigned and then doing a covered call, which is another strategy we already discussed, but not today's discussion, Greg.
All right. What kinds of stocks might a trader decide to do short puts on? Oh, by the way, let's address this question. There's a big risk to the downside, big risk. If we're selling short puts in an IRA, which is legal, now I will say no matter the option strategy, even if it's legal, it doesn't mean that every trader can do that strategy in their IRA. We still have to apply for options approval and get approval for certain levels of strategies. But in any case, if we were to do this trade in an IRA, we're gonna be required to have all the cash needed just in case, if Walmart were to fall down to a buck and we're required to buy at $95, well, we better have enough money in the account to meet that contractual obligation.
So is this a legal strategy in an IRA? Yes, but it has to be a cash secured strategy. In other words, we have to have the full amount to cover up the difference. We already got $1. 62 for this $95 obligation. The cash requirement would be an additional $93. 38 that would be dedicated to this trade. It's not technically spent, but it's sort of, you know, conceptually put on hold in the IRA, if that makes sense. Within a margin account, it's not required that we have the whole $93 in cash. It would be a fraction of that, generally around 20% of that, because is it likely that there's gonna be a huge gap between the current value of the stock and the strike price?
You know, if we drop down, there could be a gap, but falling, way down here or all the way to zero is relatively unlikely. So generally 20% is required within a margin account. But what kinds of stocks? Hopefully you've already thought about this. So Bruce says, is that a butterfly? We're not gonna get into those sorts of more advanced option strategies in this webcast series. No, this is not a butterfly. It's just a short put. That's it. But what kinds of stocks? I think a lot of you, even if you're brand new to this strategy, you're probably saying, well, Cameron, I would never do this on a stock I didn't wanna own. Well, that's probably the case with traders who sell puts, they recognize that they can get assigned at any time.
And so therefore they better be okay with ownership for at least a little while. If we get assigned the shares, does that mean that we're required to keep the shares? Not really, maybe we just sell the shares the next day, but ownership is a possibility. So, they may pre-qualify the quality of the stock as, you know, however they see fit. Maybe they wanna check the fundamentals, see if it appears to be a fundamentally quote unquote, healthy company with strong growth or value metrics. Maybe it's in a sector where the trader doesn't already have some exposure risk. Maybe they do it on stocks that they, where they've studied the chart and they're just convinced that it looks like a nice bullish stock. And if that winds up in their portfolio, they're okay with that.
But there are also other pre-qualifiers, that would be typical for other options strategies, such as highly liquid stocks or highly liquid options, lots of trading volume. The price of the stock could certainly be a consideration. Having an obligation to buy Walmart for $95, might be very different than having an obligation to buy some other stock for $500. So yeah, price per share can definitely enter the equation here. So a number of considerations. But fundamentals, the sector, the liquidity of stock and its options, the price, technicals, meaning the chart, those are some of those pre-qualifiers that some traders might bring into the equation before entering into these strategies. Now let's get into building the trade itself.
You'll notice I chose the 21st of February and I chose the $95 put for this example, but could somebody have chosen some other combination of variables here? What if we were to do, wouldn't it be nice if we just did a really short-term obligation? You might be looking at this saying, Cameron, you're obligated for 24 days. A lot can happen in 24 days. I might feel a little bit more comfortable going for a shorter timeframe. Maybe there are contracts right now, as of the recording of this webcast, they're only three days long. There are others that stretch all the way out for years, 717 days. I think intuitively, some of us can relate to going for a shorter timeframe. What if I just did same contract, the $95 contract for just three days?
Well, that serves my purposes, meaning I'm only on the hook for three days. If I really don't want to own the shares, that reduces the likelihood of that happening. It gives the stock less time to misbehave. But on the other side of the coin, it's also not giving the buyer much time to get any value. I can't get the buyer's interest rate out of this premium they paid to me. So these shorter term options will tend to not deliver as much punch. Look at this $95 put. It's trading between 12 and 15 cents instead of $1. 62. That may not even be worth it for the trader. So very short-term contracts tend to not have much juice in them. To the opposite extent, very long-term contracts will have a lot more juice.
Let's go all the way out to these 717 day contracts. Look at that. Same $95 contract. We might be able to get $8. 50 for that thing. So we collect that premium, $8. 50. Hey, that is multiples of what we're collecting right now, like five times as much. Is it six times as much? Not quite, five times as much. But there is now, we're now on the hook for a really long time, possibly. Yeah. How much can a trade misbehave? How far might Walmart fall? Could it go to 65 in the next 717 days, the next two years? Could it go to 50? Could it go to 40, and we're sitting on this obligation to have to buy the shares for 95 bucks?
We collected eight and a half dollars, but maybe we might not be feeling so good about that. So for some traders, they're trying to find a sweet spot between very short-term contracts that don't pay a lot of premium, and very long-term contracts that pay maybe a more sizable premium, but we're on the hook for a lot longer stretch, maybe there's a sweet spot in between. For some, they might define that as, you know, maybe 20 days on the low end, maybe 50 days on the high end, but there's certainly flexibility in that definition. But you'll notice the one that I chose for today's example was 24 days. But traders can always just look to see, aren't we comfortable with stretching the time commitment in order to get a higher premium?
That's sort of the trade-off there. So that's for selecting the expiration date timeframe on the contract. What about selecting the strike price? Okay, like Paul says, 20 days to 60 days, days till expiration for him. Yeah, Paul, that's somewhat typical. I've heard that a lot, but it's not gonna be universal. There are definitely differences of opinion on that. Let's go back to our 21st of February. Let's say that we've settled on this one. Why did I choose $95? Well, in this case, it's just, again, a balance of the amount received. Is it worth doing this trade? And also the associated price per share obligation. If I wanted to get a higher premium, what I might wanna do is agree to pay a higher price for the trade. So the stock.
So with the stock trading here at 97 and a half, I could even look at getting into a contract where I'm just agreeing, you know what? Maybe I was okay with buying the shares at 97 and a half anyway. And instead of buying them today at 97 and a half-ish, I'll get into a contract, giving someone else the right. Anytime the next 24 days, you can still sell it to me for 97 and a half, but they pay a premium for that privilege. And in this case, that's about $2 and 60 cents, maybe up to $2 and 64 cents. That's a full dollar more than we were collecting down there at 95. So there's a trade-off here, agreeing to pay a higher price for the stock, but also collecting a larger income for that agreement.
So look at this option chain, just sort of eyeball it for a moment and look to see what happens as we agree to pay lower prices on the stock to the premium. Or if we agree to pay higher prices for the stock and what happens with the premium and see if you sort of get sort of an intuitive feel for which ones might look best to you. I'm not asking for opinions here, but just we're weighing the pros and cons there. So that's how a trader might choose the expiration. It's how they might choose the strike price. Let's say that we've settled on our stock because it's pre-qualified. However, we like to define that. Let's say that we have selected our expiration. We've selected our strike price.
We're ready to get into a contract, but we don't know exactly the moment, the timing of the entry. How might a trade, what might a trader look for on a stock chart to signal, okay, today's the day to take this position? Well, there are a couple of things they might look for on a stock chart. One of them I already demonstrated here. Let me just clear up my drawing set again. I'm gonna draw in a couple of lines here. One up here to price ceiling known as a resistance level. And a second one down here at a price floor known as a support level. Let's put that support right about there. Looks like our stock was trading between about $95 and $90 in a trading range.
One signal for some technical traders is when we break out of a previous trading range. We call this a resistance breakout. Previously, traders were resisting advances above $95. So if we can just get through that resistance breakout, we can get through that resistance for some; that might signal the stock is ready to move in a new direction and maybe employing a bullish strategy like selling a short put might be done at that time. Another time though, I'll zoom in here a little bit closer. So you can see this in a little bit better detail. You'll notice there were a number of times where we previously tried to get above $95 and failed. After that failure, we came down here and tried to get below $90.
Failed to close below $95. Failed to close below $90 here. Failed to close below $90 here. Yeah, except for that day, a little bit below, but also failed here. What some traders will do is when they notice a series of price floors or price floor touches setting in, this touch here, this touch here, the next time it gets down to that level, they might be looking for what we'd call a support bounce entry. Also sometimes described as a close above $95. Also sometimes described as a close above the high of the low day, a hold entry. That's a bit of a mouthful. But put yourself in the shoes of a trader who saw this happening. Price had bounced off this floor a couple of times, come up again, and now it's traveled back down to that floor.
Where might the trader be thinking it's heading from here? They might think, hey, maybe we're going to go back up again. And if we do, that could be good for strategies like buying calls or selling puts. If this goes up, it gets less and less likely that current puts will be assigned and maybe higher, more likely that the trader can just get to expiration, allow the contract to expire out of the money and keep that original premium. So what some traders will do for an entry is they will look for price to pull back down to a previous price floor that looks for the lowest day, as we get toward that floor. And we define that as the low day, not a very sophisticated name, but then they'll look for a subsequent day where we close above the highest point of that low day.
Close above the high of the low day. And you'll notice right here, that day trading ended above the high of this day. So we call that a hold, close above the high of low day bounce entry. And that might signal an entry for a long call for buying a call, might signal an entry for selling a put. In any case, it might just be given the trader more confidence that the stock is less likely to collapse and really cause a short put to move into strong risk territory. So those are a couple of potential entries. It's certainly not an exhaustive list, but I wanted to give just a couple of examples. So that might signal time to get into the trade. Well, we've gotten into the trade.
When might a trader decide to get out of the trade? So what can he say? So the high doesn't have to be the closing price, right? No, yeah, that's right. Well, what we're looking for is for the closing price of a subsequent day after the low to be above the highest point of the low day. So what you can do is you can point at a candle and look up here and see its high value. So the high of this day was 91. 72, that's the H. And then as I pointed this one, so if we have a high of 91. 72, we're looking for a close at 91. 73 or higher. And on this day, we closed at 91. 94. Yep, that's 20 cents or better above the close, above the high of that low day.
All right, so we have a potential signal to enter. In this case, we're getting in because we have that breakout recently. When might a trader choose to exit this trade? Well, it really depends on their objective for the trade. It can strongly relate to that. But first of all, this is an obligation to own shares of stock. If the trader's no longer at all interested in ownership of the stock, maybe they wanna get out of this obligation. If it's a good liquid contract that we've entered into, maybe the trader stands a good chance to be able to just go buy out of that deal. Yep, so let's suppose that our stock, has gone from up here, and unlike what we were hoping for, maybe it just is starting to collapse.
Oh, this is a bullish trade. The stock is behaving bearishly. Maybe the trader's no longer interested in owning stock. They might go to their option chain, just see how much they're gonna have to pay. Those puts, if the stock has gone down, they're gonna be more valuable. They might have to pay more than $1. 62. Look at this, right now it might cost $1. 64, $1. 65, $1. 66. To get out, and the further the stock falls, the more that might cost. But yeah, that might be a motivation to get out, if the trader's decided they no longer want to be in this obligation. Now, a second reason to get out is if the trade is going well. Let's say the stock is going up, and this put is just shrinking in cost.
We got paid $1. 62 into it. Let's say we get a couple of weeks, weeks down the road, and we happen to notice, hey, it might only cost us 20 cents to buy out. If I can buy out for 20 cents or 30 cents, I'm still retaining 20% or more, pardon me, 80% or more of the original premium that was collected, and maybe the trader just chooses to buy out at that point. So one rule of thumb that some traders will employ as an exit is, if I can buy out of the contract and just be done, and still keep 80% of that, I'm still retaining 20% of what I originally collected, time to get out. So for our trade, if we collected $1.
62, if we happen to notice, let's say that we could get out for 32 cents or less, if the price of the $95 put has shrunk to 32 cents, and we can go buy it out, maybe we just wrap it up. All right, a third thing that for some traders, they might want to keep in mind is that, if they really didn't get into this for ownership, they're okay with ownership if they get assigned, but if we're getting closer to expiration, let me spell out a slightly different scenario. Let's activate this drawing. Let's move this up, and I'm going to zoom out a little bit, so we can see this expiration, okay? Let's say the stock has come down. We're getting closer to that expiration.
The likelihood of assignment on this contract is going up. A couple of factors can increase that likelihood. The closer we are to assignment, and the lower the price of the stock, the more motivated the owner of the contract is to assign it at 95. So for some traders, when we start to get within like four to maybe 10 days of expiration, they may choose to buy out of the contract at that point. But in any case, we just need to be prepared that we might be assigned. If we want to buy out of a contract, how do we do it? Well, we've sold to get into this contract. We just make sure we're in the same trading account, and we put it in order to buy the same number of contracts on the same strike price.
Right now, you can see it would cost us maybe a buck 65, 66 to get out of this, and that would be a small loss. But that's how a trade might be closed. Now, we're not guaranteed an execution on a trade once entered, so liquidity can play a role. That's why traders will really emphasize the liquidity of the stock or the option. But with that though, guys, oh, Screckety says, when you buy out the contract, you pick the same, yep, exactly, exactly right. No, you bought it's the same strike price, same stock, same expiration, yep. It can also be done from one's monitor tab. See, here's our position right here. We can just go to our monitor tab to make sure we're getting out of the right one, right click on it, and create a closing order to buy that thing back.
That'll just take us right back to the trade tab, and we can try to finesse the price that we're paying, see if we can get filled a little bit better price. But that's it. Guys, we've accomplished what we set out to do today. When we kicked things off, I wanted to do something. Building block number four, we have defined cash secured puts. We've gone through important considerations and key numbers. We've gone through the basics for stock selection, option selection, entry and exit considerations, place an example trade. That has us prepared for next week's lesson, lesson five, options, pricing, and Greeks. That's an important one, don't miss it. I'll see you for that, but I'm gonna let you go. I wanna remind you, if you haven't subscribed to the channel yet, do that.
It doesn't cost anything, and the channel is where we post our previous webcasts, so Trader Talks webcasts. Just go down and click on that. It's actually Trader Talks Schwab Coaching webcast. Go down and click on that link down below, and also follow Connie and me on X at ConnieHillCS at CameronMayCS best place to connect with your favorite presenters in between these live streams. But everybody I will see you next week. Thanks Connie for helping out in the chats. I will see you in a future webcast. In the meantime, if you'd like to join me in my other live streams, I'll also look for you on X, but whenever I see you again, until that moment arrives, I wanna wish you the very best of luck. Happy trading, bye-bye.
