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 last week, we kicked off a new series to bring that new trader who just wants to learn about options from knowing nothing all the way out to the point where they're maybe creating kind of multi-leg custom, fairly complicated strategies. And last week, we talked about building block number one in the construction, all those strategies, which is just long calls. Today, we're getting into building block number two, which is long puts. It's kind of reversal of things. I think for some people, when they're first learning about options, this one's a little bit less intuitive, where the trader is actually targeting the objective of making money because a stock is going down in price.
That can sound a little bit weird. I'll explain how it all works in just a moment, but before we get to any of that, let me first of all say hello to everybody who's already chatting in out there on YouTube. Hello there, Eva, Jay Want, Janelle, Naresh, Greg, Kevin. Dragon Rider, Bell B11 11, Ted, Michelle, Sharon, Jay Richardson, everybody else. Thanks for joining us week after week. We really do appreciate your attendance and your contributions in these discussions. If you enjoyed lesson one in this series, I hope you'll watch all the way through to lesson 10. If you're here for the very first time, I want to welcome you. And if you're watching on the YouTube archive after the fact, enjoy the show, but be aware that you're invited to join us in the live presentation.
This one kicks off promptly at noon on Tuesdays. We'd love to have you here. And also my very good friend Connie Hill is joining us in the chat; she's going to be helping the live stream audience with any questions that I can't get to. Thanks for being there, Connie. And Connie and I would also like to issue an invitation to you. If you're not following us on X, please do that. It's a great resource, best place to connect with your favorite presenters in between the live streams. You can find Connie on X at ConnieHillCS. You can find me there at CameronMayCS. But let's get into this. As we go, let's go ahead and talk about long puts course.
We need to bear in mind the risks that are associated with trading or investing, to risk certainly apply to options. So bear these disclosures 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. Any investment decision you make in your self-directed account is solely your responsibility and investing, investing involves risks, including the loss of principal. Okay. So here we are. This is our overview of our series. Last week, we talked about building block lesson one or building block number one in that first lesson, long calls. So today we're getting into long puts.
Next week, we'll talk about short calls and then short puts. And that will accomplish the four building blocks upon which all options strategies are constructed, are constructed. Just to revisit terminology here, long in broker, speak and trader speak just means that we're buying something to initiate a trade, buying a call or buying a put. Short just means that we are selling something to initiate a trade, either selling a call or selling a put. So that's where we are. Let's get into the agenda for the day. Well, of course, not everybody in this audience is gonna be familiar with puts. So I wanna define just what puts are, what they are and why traders might want to trade them. Then we're gonna look at when traders might decide to get in and get out, which options might be selected along the way.
We're gonna talk about trade management techniques, and we're gonna place example, an example trade today. So should be a pretty complete discussion from what they are to when they might be traded and how the trade is potentially executed. S says, can you please post the link to session one in this series? Thank you. Maybe Connie can do that for you, but I just want everybody to be aware that yes, our, our series is being posted to our YouTube channel. Trader Talks is the channel and you can find that here. Let me just bring that up here. So just look for Trader Talks, Schwab Coaching Webcasts on YouTube. Make sure that you've gone down and clicked on the subscribe button if you haven't already, but right here are those playlists.
And among those are the playlists for getting started with options. But let's get right to our discussion of put options. And I just want to start off as we did last week with actually placing the trade. So we're kind of starting at the deep end of the pool first, is diving in the deep end. We're gonna be placing a trade and then talk about what we've gotten ourselves into, but let's set just a, just a quick sort of logic to this trade. So the foundation for the trade, let's suppose that our hypothetical trader out there has been keeping an eye on McDonald's and they notice McDonald's has had this bit of a pattern in the way that it, that its shares trade. Shares have run up and pulled back and established sort of an upward step.
They run up and pull back, another upward step, run up and pull back, another run up and pull back. But as it's been going, it looks like those steps upward have been about $17 increments on the way up. Well, our trader, let's say our trader also notices something, probably an earnings announcement, kick things in the other direction. Since, that looks like the third week of October, McDonald's has been saying, it's selling off. And that stair-stepping appears to have been reversed. We broke down to the previous price floor, which more recently has acted as a price ceiling. Trading within a $17 range, the more recent floor has been down here at around 285. And we've just broken down through that. And let's just say that our trader has this basic assumption.
Well, if we stair-stepped up in $17 increments and those increment levels, have been acting as price floors or price ceilings, maybe as we break through this newest price floor, could it be that we're headed down to the next one, down another $17? And if we are, how might an option trader benefit from that? Well, here's the basic concept of put contracts. Last week, we learned that we can enter into a contract with another trader out there, conceptually, where we have the right to buy 100 shares of stock, from them at a fixed price for a fixed period of time. What the trader is going to do here is enter into a similar but different contract, where instead of having the right to buy shares from someone else, we have the contractual right to sell shares to someone else.
So if these shares happen to fall in value, now all of a sudden, if we've locked in a higher purchase price, there can be some inherent or what we'd call intrinsic value in the ownership of that option. So let's say the trader's assumption is that we're, looks like we're trading right now at around $280. And maybe they think we're going to slip down to about 268. That's the next apparent stair step level, the next area of support. So let's go do that. Let's go to our trade tab. Oh, by the way, let me make a quick note. The way this has been traveling down, notice the last time it made this $17 move to the downside, it took about a month. Here, it was a little bit faster, it only took a couple of weeks.
But let's say that our trader thinks it's going to, it might take us another month to get down to that $280, 268 level, maybe out here into February. All right. Well, what I'm going to do here is make sure that we enter into a contract that will provide at least for that timeframe and some extra. So I'm going to go to our trade tab. Let's place our trade. I'm going to hit the pause button right there in the discussion though, because I do notice that there's been a survey link that's been added to the chat for the benefit of our live audience. If you're here in the live audience, do me this favor right now, click on that survey link that you can see in the chat, and that'll have that survey ready for you to fill out after the webcast is over when you can give me some honest feedback.
But let me just tell you a couple of things about that survey. Really short surveys that we provide. Two multiple-choice comments, multiple-choice questions. And then if you want to provide some additional input for your presenter, you can fill in a comment's box or a suggestion box. I just promise you, if you take the time to fill out that survey, I'll take the time to read through the data and read through the comments. It definitely helps. Never a wasted effort. Okay, thank you for doing that. But any case, back to our trade, let's go here, make sure that we're looking at the right stock. We have McDonald's queued up here. Down below, we have an option chain very similar to our option chain from last week.
We can see that we have contracts running from three days in length that would expire on the 17th of January, all the way out to two years in length, 731 days. Out through the 15th of January of 2027. These are also 100 share contracts. The 100 here indicates that these are standard contracts, but we're going to be doing something quite different. From last week, we entered into a contract that gave us the right to buy shares. This week, we're talking about the right to sell shares. So if we think that McDonald's, let's say that our trader thinks the stock is going down, by the way, it's been quite cooperative so far today. My premise has been so far working out for our hypothetical trader, big red candle.
And what they're looking for is for that to continue downward, but here's one thing with: when a trader enters into one of these contracts, one of the things they may not want to have happen as the contract expires before that the stock can do what they hope it does. So if they think it might take a month to travel to their quote unquote, their target price, they may actually, double that amount for the contract that they enter into. So let's go to the trade tab and instead of just entering into a February contract, maybe we go out to March. So I'm going to go to this 21st of March and I'm going to go to, well, with the stock trading at about $280 right now, that's the last trading price for the stock.
Let's go down our available list of strike prices and strike a deal with another trader to maybe be able to sell shares to them for $280. Now this is not always the strike price the trader chooses but it's the one that we're going to choose for this example And that looks like that's trading between a bid price of $9. 65 and an ask price of $9. 90 Let's say that we're able to get an order filled somewhere in the middle $9. 80 So here's our example trade Example trade Is just going to be a long put long meaning buying a put And we're going to buy the 21st of March $280 put and assume a fill somewhere between $9. 70 and $9.
95 Let's just use a nice round number and call it $9. 80 Okay So Janelle you love that strike a deal reference That's the way that I think. About it, Janelle. Yeah. Yeah. Because there are some terms of this contract that we want to bear in mind. Now, before I go to get into the specific terms, they're going to look pretty familiar. If you watch Lesson One, there's largely going to be overlap here. But why do we refer to these as a put? Well, the way that I think about it is that if we enter into one of these contracts, if we spend the $9. 80 or on a hundred shares, $980 is going to be the cost of one contract. What do we get in return?
Well, we have the contractual right to sell shares to someone else. Or, in other words, we have the contractual right at our discretion anytime between now and the 21st of March to put shares into someone else's account through a forced sale. Just imagine the shares going into the other person's account. We're putting those shares into someone else's account in exchange for what? Well, for a specific sales. Okay. So that's kind of why we call that the put. But just to revisit the terms of this deal, number one, we have the right to sell 100 shares.
Okay. And in this case, we have the right to sell those shares for $280 because we bought the 280 put. Let's put this down here next to the strike. Let's copy that, paste it right down here because we struck that deal to sell shares for $280. There's also a timeframe to this trade or an expiration. This thing expires in 66 days. So anytime for the next 66 days, we have the right to sell shares for $280. Another element of this contract is that we paid a premium to enter into this deal. And in this case, it was $9. 80 per share. Again, we don't know that that's actually going to be the purchase price of this contract if and until we're able to get an order filled.
Just like with our call contract, this contract is transferable. I really want to emphasize this. Okay. S says, What would have been a good price to purchase the shares to begin with? That's a tough question, right? Not to get too far off track, but of course, we would have felt awfully nice if we were able to sell or buy the shares back here and sell right up there. That's going to be a discussion for a stock trading discussion. But one thing that a trader might do if we have an interest in using charts to plan trades is learn about what's called technical analysis. That's just the discipline of studying charts. In an effort to try to improve one's performance on trading or investing. And we definitely have some webcasts dedicated to that topic.
All right. But this is a big deal with calls and with puts. I don't know if you noticed this in lesson one, but the objective when buying options is not always to get one's hands on the shares or to sell the shares of the underlying stock. Instead, the objective commonly is to buy the option itself. And then sell that option, hopefully at a higher price, to transfer that contract to someone else for more than we paid for it. So we're paying 980 with the hope that we can transfer that long call or long put ownership to someone else for more than 180. That's it. And then finally, with this contract, just like with our other contract, there is a buyer and a seller. And today, we're taking a look at a couple of those.
And we're going to take a look at a couple of those. And we're going to take a look at a couple of those. And we're going to take a look at a couple of those. So we're taking the role of being the buyer of the contract. However, next time in an upcoming lesson, in Lesson Four, we're going to get into being sellers of puts. Why? What motivates the seller of a put contract? What's in it for them? What are the pros and the cons? How do they make money? And how do they lose money? All of that. So there is our put contract. And I hope as you look at that, you can start to envision how the trader might benefit from this. Just envision here. Let's say that we pay the $9.
80. We lock in a purchase price that allows us to buy the shares for $280. And then the stock does fall on down. Let's say it goes down over the next three or four weeks. And we find ourselves down here at $268. Well, if the stock's trading at $268, and we have the contractual right to sell shares above market value, there's at least $12 of value in that contract. So our contract is already growing. So we paid $9. 80. At that point, it'd be worth at least $12. It would actually be worth more than $12 because it's giving the owner of that contract a $12 discount on the shares, allowing them to purchase, or pardon me, allowing them to sell shares that are worth $268 for $280.
There's a $12 advantage over just selling at market value. If this makes the move fast enough, there's still time left on the contract for that value to continue to grow. And that time element contributes to the value of the contract. So yeah, we're going to get into the pricing of options in lesson five, because it's key. We need to understand that. But Paul's saying, what about the planned exit? Yeah, Paul, that's a good question. But here are the terms of our contract. Let's go learn about these a little bit more detail. I'm going to go back to our slide deck and just do some reading. Visiting of this of this deal. So what does it mean to buy a put?
Well, buying a put gives you the right, not the obligation between now and the expiration 66 days from now. We can choose to sell shares at $280, not required to, okay? It's the right to sell the underlying stock at the strike price at any time up until the expiration date of the put option. That's what it means that we've already put the cash. And now we know that we're buying this put. What's the goal? Well, to benefit from a swift downward movement in the stock price. And I know it's that's where it gets a little bit weird. How does a trader make money? Because something is losing value, the stock is going down. Well, it's because we already locked in a high sales price.
And that can be attractive to other traders if we want to sell that contract to someone else. Now, another element of this put contract is just like with calls, there's limited risk if we invest $ 980 in this put, that's the most that we can lose theoretically in this put. If we do something else, I would say theoretically, because if we exercise the contract, if we add on other contracts to this, it can definitely change the risk profile of the trade. But yeah, there's limited risk. The maximum loss is the premium that was paid for the put. If the put expires worthless, that's when the entire premium would be lost. So when would that put be worthless? Well, let's say the stock goes up in price instead of down.
We're thinking it's gonna go down to 268. What if it went up to 300? And we're sitting there saying, hey, everybody, if you want to, you can buy this contract from me that allows you to sell the stock for less than it's worth, not valuable. Yeah, we definitely want the stock to go down. Okay, so what are the benefits and the risks of getting into this? Potential benefits, the maximum gain on this trade is actually, is actually substantial. If this, in our example, if the stock goes down to 268, that's great. If it goes down another $17, that's even better. If it goes down $17 from there, it just gets better and better and better. Ultimately, there's only so far a stock can go down; it can go to zero.
But until that time, we have theoretically the right to sell shares for $280, even if they're only worth 200, even if they're only worth 150, there's a huge amount that could be made on, there's a huge amount that could be made on, put. This also leverages things to benefit their downward movement of stock price with a much smaller investment than shorting the stock. Shorting the stock means, we took a stock position that can benefit from the shares going down in price. Well, that ties up a lot of money. This position does tie up $980. And as the stock goes down, that relatively small investment can result in very large rewards, which serves to leverage the amount that can be made on this trade.
As a percentage, long options carry a much greater potential or reward than just buying or shorting shares of stock. Now, we do have a time frame of this trade, and we need to be aware of that. That typically, options, when buying options, they're used for short to maybe intermediate-term trading. There is a cap on how long these can go. You already saw there aren't options available out beyond about two years on this stock. What are some of the risks? Well, we can lose the total value of our investment, the $980, and that is much more readily lost than if we had bought or shorted the stock. If we spend the, what was it, $980, and the stock goes up instead of down, and we just sit there waiting, hoping that it goes down, and we run out of time, we could lose the whole $980.
So time is an element in the performance of this trade. Each day that ticks by, if the stock isn't going down, that's chipping away at the value of this investment. It had 66 days of potential when we bought it. If we wait a week, now it only has 59 days to get it going and start dropping. And if it doesn't fall and another week goes by, now we only have 52 days; the contract shrinks in value as time goes by if the stock is not moving in the right direction. That could definitely negatively impact the option price. But also, one thing that we're gonna discuss in lesson five is the volatility of the stock. If the stock starts moving around a lot, that can actually benefit the value of our option, even if it's not net going up, or actually, as a matter of fact, even if investors expect the stock to start moving faster, that can actually increase the value of the option.
Volatility definitely plays a role in these things. Now, finally, there is a breakeven point. With a put, the equation for figuring out where we just breakeven on this deal, if we buy the put and we hold it all the way to the end, we hold it the full 66 days, and that equation is we take our strike price, $280, and subtract the premium that we paid, $9. 80. Should've gone with 10 bucks, just to make this math easy. I wanna talk through that. Let's go back to our chart here. Let's say that we buy this put, and I might even have to add some space here. Let me come down here to our right expansion settings, and let's change those. The right expansion settings is just how much white space you have out to the right.
So that's the right of the last candle on your chart. Let's add maybe, let's crank that out to 50 days and see if I can get that in here. Yeah, there we go. So when I added some more time here, you can see now that we can see out there to the March expiration, which is the term of our contract. That's what these red dashed lines, these are showing us monthly expirations on these contracts, but let's say our stock happens to go down from where it is, but it goes from 380, or pardon me, 280. Let's say it only goes down to about 270. Okay, so I'm going to draw in a line here. And let's say it comes right down to 270, but it takes the full time of our contract to get there.
Gets right down to 270. All right. All right. Let's talk through what this means to our trader here. So on expiration, our stock has gone down. It just didn't go down very sharply. You notice it's a little bit more of a shallow drop. All of our time has run out. So at the end of 66 days, we still have a contract that says, hey, Cameron, you can sell this $270 stock for $280. Awesome. I got a $10 advantage over market. Market price. Great. Except I spent basically $10 to get it. So if I spend $10 to get a $10 advantage, and now I'm out of time, yeah, that's a breakeven trade.
So to calculate that, we just took the strike price of the stock, the strike price of the contract, and subtracted the amount that we paid for that deal. That's it. So basically, our breakeven on this trade, would be right around $270 at expiration. That's a key note. Because if it made the same $10 drop, and it did it quickly, let's say it did this. Let me activate this drawing and pull this arrow over here. Let's say that in just the next few days, it made that same drop down. Well, we would now have a $10 advantage over current price. We'd be able to sell the shares for 280 that are only worth 270. So it would have $10 of what we call intrinsic value.
But we also have all of this time left in the contract. All of that time left in the contract represents potential. So, what we could do, theoretically, is if we were to go to sell this contract to somebody else, it would basically be like saying, 'Hey, everybody, I have a contract that allows me to sell shares for $10 more than they're worth.' And the other traders are thinking, well, that's fantastic. I got a $10 advantage over the markets. And they're still a month and a half or two months left on that contract. So if the stock continues to go down, that can continue to add value, still allowing the new owner to sell shares for 280 bucks. Time has value. So instead of just being worth $10, it might be worth $15.
It might be worth $20. Okay, there we go. So that's important to understand beyond that breakeven point. Breakeven is an assumption. If I were to rewrite this slide, it would say breakeven at expiration. Other things to consider, what kinds of stocks might a trader be considering trading puts on? Well, you saw the sort of technical assumption of McDonald's. But our stocks are going to bear a lot of similarities to what the trader might be looking for with calls. For example, stocks with higher trading volumes, options with higher trading volumes, options with a narrow spread between the bid price and the ask price. All of those are shared with, those are similar characteristics to what we're looking for for buying calls. But additionally, very differently from our calls, a trader here might be looking for what's happening with the chart.
And they may be looking for stocks that appear to be in a bearish or maybe a neutral trend. And they may be looking for stocks that appear to be in a bearish or maybe a neutral trend. Downward to sideways. If it's going sideways, maybe they're looking to buy the put at a short-term peak, and then sell it if the stock price has dropped. They might be looking for downtrending stocks that are breaking below support. And by the way, these three elements here, this might be, this is a pretty good description of when, of the specific moment when a trader might decide to buy the put. These first few bullet points are sort of, you know, pre-qualifiers. Okay, the stock's in a nice downtrend, or maybe it's going sideways.
It has all of these characteristics of liquidity. But when might be the moment of the trade when we enter or buy that put? Well, when the stock breaks support like it just did on McDonald's. Some traders may see, oh, it's been hovering above a price floor, and then it breaks down through that price floor. It might be starting its journey to the next price floor. That could be a time to buy. Might also be, oh, it's been hovering above a price floor, and then it breaks through that price floor. That could be at a time when the stock is bouncing off what we call resistance. Just envision for this scenario, let's say that, well, let's just go back to our McDonald's example. Here, our stock took a big dive down.
It came down to a price floor right around that 285 level, right there. And from here, where might the trader be thinking the stock is likely to go? Well, it might be heading back toward the previous price, ceiling, or what we call resistance. Is that a great time to be entering into a contract that benefits if the stock goes down in price? Nope. Instead, the trader might wait for price to go back up to the ceiling. And if it starts to bounce against that ceiling, if price struggles and starts to fall again, that could be an entry signal. And specifically in these scenarios, the trader might look for something that's called a cablode entry. Where we get a closing price below the highest candle or below the highest day.
Let me zoom in on this so you can see what I'm talking about. So here, our stock is working its way from this price floor up to a price ceiling. And our would-be put trader is saying, boy, if this starts to really reverse, maybe I'll get into a new put. Well, on its way up, the trader might look for the highest day. And it looks like as we're approaching that highest day, we're going to see a price ceiling. And we're going to see a price ceiling. This is the candle that stuck its little tail up the highest. So we call that the high day. And then they may be looking for a subsequent day where trading closes below the low of that high day. Okay. So there's our low.
And it looks like on this day, we had a red candle where we closed below the low of that high day. What that might mean to our trader is that prices have stopped going up and momentum seems to have shifted. And so we're going to see a price ceiling. And we're shifted, started going down. Maybe it's time to get into one of these contracts. Maybe ride this thing on back down to the next low. So those are potential reasons for getting into a put, breaking below a support level, bouncing off a resistance or a price ceiling. Or some traders look for a close below the low of the high day. They could employ other things like flag patterns and other price patterns. That's for those who are familiar with those sorts of technical approaches to trading.
So when we decide to get in, now it's time to go choose a contract. And I've already touched on some elements of selecting a contract. These are some additional considerations, or these are just some considerations when buying these puts. We've decided today's the day. We have our liquid stock that's breaking through support or it's bouncing off resistance. Let's go buy a put. Well, which expiration date might we choose? As a, as I demonstrated in this example, quite commonly traders will calculate how much time they think the stock is going to take to make its move. And then they'll double that for the expiration date they choose for the option that they ultimately buy. And there's a, there's a couple of benefits to that. Number one is it gives the trade enough time.
That's kind of sort of, it's fairly obvious, but I got to state that. But, but, but secondly, and perhaps even more importantly, is if the trade, let's say that we expect a one-month move on the stock. So we buy a two-month contract. Well, if the stock makes its move in one month, now it allows us to go exit that put, go sell that put while there's still a month of potential left in the trade. That can make that, that increases the value of the option and potentially allows the trader to sell at a higher price than they could get like at, at expiration. So yeah, doubling the, the expected timeframe is a pretty common technique here. So which strike do we choose?
And by the way, before I move on here with our expiration dates, the further out that expiration date, the longer the term of the contract, the more expensive that option will be. That's just the way that works. So, buying longer-term options, it gives us the ability to hold on for a longer period, but at a higher price. Those options will tend to carry as a result, less leverage. So which strike price do we enter into a contract that allows us to sell the shares for 280 or 270 or 260, maybe 300 or 320? Well, with the one that we chose, we chose the 280 put. It gave us the right to sell shares for roughly what they're worth right now, but at any time for the next 66 days.
Another trader might've said, 'You know what? I wanna lock in a higher sales price. I don't just wanna be able to sell the shares for 280. I wanna be able to sell those shares for 290. Well, they have to pay a higher premium for that. You'll notice we are theoretically paying around $10. They might have to pay around $15 to lock in a contractually higher sales price. This contract is what we'd call in the money. It's already allowing the trader to sell at a higher price than the current market value of the stock. We'd say it has intrinsic value from day one or it's in the money. Now, a different trader might say, I don't wanna spend so much money.
I'm gonna buy a less expensive put, but it's only gonna give me the right to sell at a lower price, a lower strike price. So there are pros and cons to each of those, to each of these decisions. But if we were to buy the 270 put, we'd have the contractual right to sell shares at 270. And you might think, why would we want that? The shares are worth 280, yeah, right now, but 66 days from now, if the stock hits a rough patch, maybe those shares are only worth 250. This trader would still have the right to sell those shares for 270. And they didn't pay as much. They didn't pay as much for that right. So which strike price is the right strike price?
That's gonna be up to the individual trader to find that balance between paying a higher premium and having the right to sell at a higher or lower price. Okay. But yeah, with strike selection, some traders choose the at-the-money, as we did with this example, that's the strike price that's closest to the current price, or maybe going in the money. But again, others may actually even go out of the money. The outlook, regardless of expiration, regardless of strike price, the outlook for this trade is bearish. And the trader needs to customize how many contracts they enter into according to their own risk tolerances. And this is known as position size. How large of a position do we take in this trade?
Some traders just base that position size, assuming that, that something goes awry, and they lose the full value of the trade. So in this case, what's the most that we could theoretically lose? 980 bucks. So let's say our trader has a maximum risk tolerance per trade of $2,000. Well, if we could lose $980 on one contract, maybe that trader would buy two contracts. All right. Now, this is where the money is really made or lost though. We've talked about what a put is, why a trader might trade them, when they might buy them, considerations for which options to select. Well, when might they choose to get out? Well, there are a couple of things to bear in mind here. Some trades go well, some go poorly.
And there are other things that can enter into the equation that might just change our minds about whether this is a wise trade to be in, so for a profitable trade, maybe the trader just gets out if they hit their price target. So with our example, that would be if we happen to fall, let me zoom back out here on our chart. We got in here and man, it keeps going in my direction, which is great, except we're not in this position yet. Anyway, let's say that our trader gets to their price objective. Maybe they sell that option at that point. Now that's if the trade is going well. But what if it's not going so well? Well, for an unprofitable trade, maybe the trader gets out if their contract is losing money rather than making money.
And one approach that's sometimes used is just allowing this option, which is leveraged. It can move around in value quite a bit, but if it loses more than half of its value, the trader might just say, you know what? This isn't going the way I thought, so we're going to get out. So we got it in at $9. 80, maybe we put in what's called a stop order at $4. 90, half of the value. Stop is not a guaranteed price that we'll get out for that amount, but it's just setting a line in the sand. And then along the way, if the stock is cooperating, it's going down, the trader may choose to adjust that stop.
So maybe they're risking 50% of their value initially, but if the price is moving in the right direction, maybe they adjust that stop to start to minimize that loss. Let's say they had a stop in at $4. 90, and they move that stop to a break-even point as the value of the option is increasing. Now, finally, there's something called a special event. Maybe something changes the trader's mind. Maybe they're in this put on McDonald's, and they're all excited. They think the price is going to go down. And then they, I don't know, they're in this put on McDonald's, and they're all excited. They think the price is going to go down. They start selling McRibs again. And stock starts to rally. And the trader says, I haven't hit my target.
My stop hasn't been hit yet. But things have changed. I just want to get back out. That's a possible reason. But yeah, earnings might change the trader's logic on a trade. If there's some corporate news on the company's outlook, maybe the trader just decides to get out. But what I want to do here now is let's go back to our trade and put in a stop. Okay? Here's how we might do that. Did I ever actually even submit this trade? I guess I didn't. I talked about it, but we didn't actually buy it. Let's go ahead and click on the ask price. Let me show you how you can actually put in the buy order and the stop order at the same time. Let's do that.
So I'm going to go to the ask price, and I'm going to right-click on that. And I'm going to put in a custom buy order with a stop attached. Right? So here's our buy order. Let's say that our trader wanted to do two contracts. So that's assuming they buy in for about $10. That's $1,000 per contract. If they buy two of them, that's $2,000. They lose the full value. They've lost the $2,000. So let's set maybe our limit at $10. I'm actually setting that above market price just for the example here. It's just saying I don't want to spend more than $10. And then we're going to sell those two contracts. Let's link those together. Click on the chain link.
That links our sell order with our buy order. Makes our quantities match. Actually, I had to do that before. I didn't get it done. That's okay. I'll just change it manually. But our stop, let's put this in at $5. So if we buy for $10, we're going to have a stop order, a sell order to get us out. If the trade's not going in our direction, maybe time is chipping away and the stock just goes down. So we're going to sell those two contracts. Let's link those together. Let's make sure that's a good till canceled order. So there's our trade. Let's click confirm and send. It looks like I'm being awfully generous with my limit price. It looks like we're trading down around $9.
80 right now, maybe $9. 70. But in any case, let's put in this order to buy at a maximum of $10. It's not a guarantee that we're going to get filled here, but we'll see. Stop at $5. There is a commission to get into this trade. And if we're stopped out, get out of this trade. But just remember, due to potentially wide markets or liquidity risks at the activation time of the stop, this order may be manually substituted with a limit order upon activation worked until filled. So they might switch out our stop with a limit until it gets filled. Anyway, but let's send that order off and we're in. Okay. So we just entered into this put contract.
For the next 66 days, just to summarize, we have the right to buy 200 shares for $280 per share. And the further that stock falls, the more valuable that contract becomes. The faster the stock falls, the more valuable that contract becomes because it retains additional days of potential. That's what we're looking for out of this. So if this is your first time seeing a put, there we go. We've accomplished what we set out to do today. We've discussed what a put is. Why traders might enter into these contracts, when to buy, when to sell, even placed an example trade. So it's time for me to let you go. We've accomplished building block number two. Time to move on to building block number three next week. We've already accomplished all of our agenda items.
But next time in Lesson Three, we're going to be discussing short calls. What might motivate a trader to actually sell calls and accept the premium rather than buy the calls and pay the premium? Gary says, what's the name of this strategy again? You didn't see it. So this is just a long put, Gary. Right there. Long put. All right, everybody. Go enjoy the rest of our educational webcast today. I will look for you again next week. But just remember, if you haven't subscribed to our YouTube channel, do that now. Go down and click on the subscribe button. YouTube is where we host all of our playlists for our previous webcasts. You can also join our live streams here. And you can even do researches for specific topics of interest through our previous webcasts.
So a quick way to learn. It doesn't cost anything to subscribe. So click that subscribe button. Also, if you're not following Connie and me on X, please do that. It's the best place to connect with your favorite presenters. I'm only presenting about four hours a week. Outside of that, my main communication channel is through X with my audience. So you can find Connie on X at ConnieHillCS . com. You can find me on Twitter at ConnieHillCS . com. You can find me there at CameronMacia. So just like with YouTube, it doesn't cost anything to follow us on X. Now, thank you to everybody that's already clicked the like button. We had about 200 people watching the live stream just now. 58 already clicked the thumbs up. That's always appreciated.
That sounds like applause to your presenter. And it gives them a boost in the YouTube algorithm, gets their webcast out to a wider audience. So click the thumbs up every time you've enjoyed a webcast. And now it's time to go fill out that survey. Just for my life. Live stream audience. Click the survey link. Give me some honest feedback. It always helps. Everybody, thanks for giving me your time today. I'll see you in a future webcast. 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.
