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 this is specifically lesson eight in a series of 10 lessons that are intended to bring along that trader who would like to learn more about this world of options trading. They know nothing about it. We want to take them all the way from knowing nothing to actually being able to create some fairly complicated trades, and that's actually what we're going to be doing today. Over the last two lessons, we've been working to build what we call combination strategies, combining different contracts into combinations of options trades. So today, we're talking specifically about short call spreads. It's a bearish strategy usually used primarily for income, but also carries large potential reward as well.
We need to weigh the pros and the cons of this strategy, discuss how it's built, how it might be applied to a portfolio. We're gonna be placing an example trade on the short call spread. Lots to cover. Before we can get to any of that, though, let me first of all say hello to everybody out there in YouTube who's joining us. Hello there, Randy and Kenneth, Mike, Janelle, Joe, David, Lawrence, Eva, Rodney, everybody else. Thanks for joining us week after week. We really do appreciate your attendance and your contributions to these discussions. If you're here for the very first time, we want to welcome you as well, and if you're watching on the YouTube archive after the fact, enjoy the presentation, but be aware that you're invited to join us in the live discussion.
If you'd like to be here, this is a Tuesday webcast series, and the presentations always kick off promptly at noon Eastern time. We really would love to have you here in the live stream. I also wanna let our live stream audience know that my very good friend and colleague, Connie Hill, is gonna be hanging out in the chats. She's gonna be answering any questions that I can't get to just as long as they're on topic. Connie's there to pick up the slack for me. Thanks for being there, Connie, and Connie and I would also like to issue an invitation to everybody watching, whether in the live audience or just watching, on the archive. Make sure that you're following us on X. If you have an account with X, go give us a follow.
It's the best place to connect with your favorite presenters in between the live streams. You can find Connie there at ConnieHillCS. You can find me on X at CameronMayCS, but let's get into this discussion of short call spreads, and of course, we always need to kick things off with a quick revisit of the risks associated with investing. This is something that we need to bear in mind. It's important. So, uh, uh, these disclosures, uh, pay close attention. 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.
Schwab does not recommend the use of technical analysis as a sole means of investment research, and any investment decision you make in your self-directed account is solely your responsibility. Okay. So, if you happen to be watching, if this is the first of my, my webcasts that you've seen, welcome. I will still, I'll try to go at a pace that you can follow, even if you didn't catch the first seven lessons in this series, but just to let you know where we've been, we started off in our first four lessons, learning the building blocks, the essential building blocks from which all options strategies are constructed, long and short calls and long and short puts. Then we talked about the importance of the pricing of options and how the Greeks might help us understand those.
So that was a lesson five. Lesson six, we started getting into these combination strategies, starting with building a long call spread. Then we went to a long put spread, a bearish strategy. Today, we're doing a second bearish combination strategy, which is known as a short call spread. And then we'll wrap things up with the combination strategies next time, short put spreads, and finally conclude the series with a discussion of how do we choose among these many strategies we've learned eight, nine, 10 different strategies over the course of these, these lessons we've learned. So how do we pick one for whatever the, the trader expects the markets to do? So choosing a specific strategy is going to be less than 10. So here's what we're going to be covering in today's lesson.
We're talking about short call spreads, also known as short call vertical spreads. As we've discussed before, this term carries through to all of these combination strategies, spreads and vertical spreads because of the distinction just between the, the two strike prices involved in the construction of the strategy. But we're going to talk about what they are and why some traders may choose them. We're going to go through the basics of short call verticals, discuss trade management. Once we're in planning exit strategies, we're actually going to wrap where we're even going to include, I should say an example trade today. So just to set the conceptual foundation for the discussion, this is a bearish strategy. Let's go look at what's going on. We're going to start with the S& P 500 right now.
So it's been a great last 12 months for the S& P up and up and up and up. We have climbed, we've actually started 2025 very strongly. And yet over the last four weeks or so, five weeks, we've hit kind of a holding pattern, running up and pulling back up and back up and back. Really, the S& P has struggled to get above about the 61. 35 level. And then just today, it looks like we're pushing down and threatening to have the lowest, lowest close we've seen since actually all the way back here January 14th was the last time we closed as low as where we are right now. So let's put ourselves in the, in the shoes of a hypothetical trader here who sees this bearish momentum in the short term.
And maybe they expect as they're planning a new trade out here for the 21st of March, maybe they expect prices generally to continue to fall. So they're bearish. Well, if a trader is bearish, in the world of trading options, there are a couple of the most basic choices would be to buy a put, which was a discussion last week, buying put vertical spreads, or maybe selling a call. That's also a bearish strategy. So we're going to tilt toward that. We're going to be talking about selling calls, pros and the cons of those, but also layer on a second contract to create this combination strategy known as a bear call spread. What are the risks and advantages of that? That strategy. So for today's example, trade let's take a look at what's going on with Alphabet or Google.
So here's what's been happening from a chart perspective: It just much like the S& P 500 was having a nice run, hit a peak just about a month ago. Then, really started to drop, fell down to a price floor. Notice a previous price ceiling around this level, maybe one 82, one 82, two and a half level. That was a price ceiling here for a couple of months. Google struggled to, to rise above that. Then that was a pretty good price level for about two and a half months, but just over the last 48 hours of trading, we've broken down below and have remained below that level since then. So let's say that our hypothetical trader here thinks that price is likely to continue down, maybe going down to previous levels back here.
There was a pretty good, pretty good confluence of the trading levels there. So a bearish strategy, maybe we could buy a put, but today we're going to be selling a call. All right. Now, if you're not familiar with selling calls, we covered this. You might want to go back. Or if you, if you noted as I was going through those lessons, we went through buying calls and buying puts, then selling calls in lesson three, that might be something you want to revisit. That sets the stage pretty nicely for this discussion, but it is a bearish strategy. So I want to go sell a call on this. So let's go. Let's go to the 21st of March contract. So here on the thinkorswim desktop platform, and we do use this platform throughout the lessons.
So if you're not familiar with this, um, you may want to download it from your, uh, thinkfrom primary, from your, your Schwab online account. Thinkorswim is a, it's just trading software that can be downloaded for free from within your Schwab online account. Just go to the trade tab and you'll see a link for, for thinkorswim. Sorry. I actually try to do things for two, two things at once for just a moment. I was reading chats and trying to talk. Not always a good idea. Um, Alexis, I don't know that we're going to have time to do a visit that question today, but in any case, let's go to the 21st of March here and let's initiate a bearish trade. And I'm going to open up my left column here and make some notes about this trade.
So with the stock, breaking down below about that 182 level, let's look up here at maybe, I wonder what we could get for selling maybe an $185-ish call. If we sell that 185 call, that'd be up around here. Let's carry that out to the 21st of March. And this is a bearish trade with the objective for price to be below that level as we move toward that 21st of March expiration. So, 185, how much can we get for that? It looks like that's trading between two cents, 17 and two 20. If you'll forgive me just for just for the benefit of using nice round numbers. Let's say that we get kind of fortunate on that fill and we're able to sell this call for $2 and 20 cents.
So we sell the 21st of March, uh, one 82 and a half. No, pardon me that I was looking at the one 82 at the one 85. Yeah. The one 85 call. Let's say we're able to get $2 and 20 cents for that. So, what explicitly, if we think back to what we learned in lesson three, what explicitly are we doing? Well, we're entering into, let me, let me move this down. So we actually have the right line highlighted here. But any case, um, what is the contract that the trader would be getting themselves into? Well, specifically assuming a fill of $2 and 20 cents per share, they're receiving a payment to $2 and 20 cents per share for a hundred shares. In other words, $220 is the motivation for this trade.
But if that's the motivation of the trade, what are the, what's the obligation associated with that contract? Well, we're getting paid $220, but for the next 24 days or through the 21st of March, someone has the right to buy shares of stock from us for $185. In other words, they have the right to call $185 away from us. Okay. At 185, but one hundred shares at $185. So we understand the motivation. $220 can be enticing as a potential income, but there's also a risk here. What the trader might be hoping for is I just want the $220 bucks. I don't really want to have to deliver the $220 shares. And actually there's a very specific scenario where we may never have to deliver the $220, the $220 shares.
The hundred shares that at $185. And that is if the stock remains below 185. So just remember here's 185 right here. And if the stock is going down, even if someone has the right to buy shares from us for 185, there's actually very little motivation for them to do. So with the stock right now at $177-ish, ah, not much motivation to pay $185 for $177 stock. It's really, if the stock rallies up above 185, it goes to like 190. Ooh, now we're talking now, somebody might want to exercise their right us to assign that contract and buy those shares at 185. So you can see why our motivation here is for the stock to go down.
Juan says, I may be a little too advanced on this, or it may be a little; I'm not sure whether you're saying that you have a little bit more experience or this meaning this, this lesson is going a little slow, or could this be a little bit too high level for you? It's a possibility. Everybody's somewhere along their own personal learning curve. Fortunately, these webcasts are recorded. So, um, regardless of a one's level of experience, if we need to go back and rewatch and slow it down and hit pause, we can do that. And as a matter of fact, if we F if we need to catch up after this webcast is over, what you can do is make sure that you are subscribed, right? To our Trader Talks channel.
If you haven't done that already, go down, click on the subscribe button, then find it. You know, um, what that does is it subscribes you to the YouTube channel, Trader Talks, Schwab Coaching Webcasts, which is where we house our playlists from our previously delivered webcasts, including this series. So if you want to find the rest of this series, just go to YouTube, look for Trader Talks, Schwab Coaching Webcasts, go to playlists, and then just scroll down through the playlists until you find Getting Started with Options. Now, interestingly, it's going to actually going to have Barb Armstrong's portrait here instead of mine right there, but, um, Getting Started with Options. If I click on 'View full playlist', there are the rest of the lessons in this series.
And right here is a less than less than three short calls. Okay. So back to our discussion, I think we're understanding that. We're understanding the motivation for the trade. We're understanding the obligation of the trade. And for some traders that, that, uh, if they're really convinced that the stock is likely to go down from here, it might be okay with this sort of open-ended obligation through the, through the next 24 days, they might have to deliver shares, um, for $185 per share. As a matter of fact, I want to start placing a trade for that, for that trade scenario. Let me go to the 185 calls and to place an order to sell on thinkorswim. We just click on the bid price.
So as I click on that, and it looks like it might be more like $2 and 15 cents at this point, let's go for 215. Let's say that we're willing to accept that as I click confirm and send this confirmation dialogue box is actually going to highlight one of the major issues and risks with this strategy. Strategy. What do you see right here on the line that says 'max loss'? Max loss, when selling a call, when we don't have it in some way covered, is infinite. Yeah. If this is the only trade that we have on Alphabet, no stock position, no other options position, all that we're doing is taking on an obligation to maybe have to sell shares to somebody else, but we don't actually have shares to sell.
Well, now we know the price at which we might have to sell them, 185 bucks. We don't know how much we might have to buy those shares for. This is what we'd call a naked call option with an infinite risk potential. It doesn't mean it's an entirely illogical trade. It doesn't mean that there aren't some traders that go right ahead and place this trade because they recognize even though there's an infinite, indefinable risk to the upside, they may really be convinced the stock is going to go down, or at least that it might not go up very much. And if they need to, they can go buy some shares in order to fulfill the terms of the contract if they have to sell the shares for 185.
Now, the maximum profit is just the amount of the premium collected. In this case, if we get 215 per share, that's 215 bucks. But with this infinite risk, that's one potential issue. Infinite, undefined risk to the upside. If the stock goes rocketing up to, let's just exaggerate things, let's say it goes shooting up to 300 bucks, and we have to sell shares for 185, and there's no other way for us to get access to those shares except to go buy them for $300 and then sell them for 185 bucks, that would be, in that sort of exaggerated example, a $115 loss per share. That would be massive. And it doesn't stop there. The higher the stock goes, the more the risk in this trade.
There's an infinite risk because the stock can keep going higher and higher and higher. So that's one potential issue. Second potential issue is whether, even if a trader really wants to do the trade, they can't do this kind of a trade within an IRA, within their retirement account, because taking infinite risks within an IRA is not allowed. Can't do it. If we have a big loss in an IRA and we think that's okay, maybe I'll just stuff some more cash into the IRA to cover that loss. No, can't do that. If we have a big loss in an IRA and we think that's okay, maybe I'll just stuff some more cash into the IRA to cover that loss. Can't do that. There are contribution limits in an IRA.
So there's not any way to cover that unlimited risk except to ban that trade. So here's what happened. Nope, not allowed in an IRA and it would get shut down. So there are some issues. There are some issues with just selling what we call a naked call. So for today's example trade, we're not going to do a naked call. We're going to do, let me just spell this out. Our example trade is going to be a short call spread. Now it's called a short call spread because we're going to be selling net. We're going to be receiving a credit still. Short is the terminology that we would use when we sell to enter into a position in sort of broker speak or market terminology.
We're using calls to build this trade. And just like our other trades, there's going to be a spread between the price on one contract, price on another contract. All right. But here's what makes it into a short call spread. At the same time, we sell the 185 call in this example for 215. We're going to go buy. Let me take my caps lock off. Buy in the same expiration, a less expensive call. So let's see. Well, 185 is straight. Look at this. It keeps shrinking, which is actually what we would want. Let's say we can only get $210 for that now. But let's say we go to the 190 call. Let's buy the 21st of March 190 call. And that looks like that's trading for 106 to 109.
Let's say we're, you know what? Let me do this again. Let's be a little bit less favorable. And let's just say it costs us $1.10. Why did I do that? Because it's a nice round number. It just keeps shrinking. So let's say we go to the 20s. That keeps the focus less on the math and more on the learning. All right. So what does this other call do for us? It accomplishes a lot for that $1.10 investment. A couple of major things that this does. First of all, it covers the naked, the naked element of this short position. The reason we call this, if we just sell a call and we don't own the stock and we don't own another call option.
We call that a naked position because if the call gets assigned, oh man, oh, I feel naked. I'm exposed. I don't have the shares that I agreed to sell. Well, this still, Janelle, you like the simple math, so do I. What this does, well, with a short call, we know that we have an obligation to sell shares. What this does for the trader is it defines the maximum that they would have to pay to buy the shares. For that $1. 10 per share, we're locking in for the same period of time the right to buy shares for $190 if we need them. With this trade, we're actually hoping that we don't ultimately need the shares. The real objective of this trade is for both of these things to just expire worthless.
This is sort of just an accepted cost of doing business with doing short calls. The real driver of this trade is still the credit that was received by selling the $185 call. We've just given up some of that to cover the obligation of that $185 call and dramatically limit the risk. For $1. 10 in this example, we're going to cut the risk from unlimited to $4. So let's talk through that. How much are we actually receiving net now? If we just sold the short call and just took on our shoulders the obligation of having to sell shares for $185, the maximum gain of the trade would be $2. 10. But now our net credit here, which is also the theoretical max gain of the trade, is that $2.
10 minus, the $1. 10. So it's leaving us with $1. Let me open this up a little bit more, just so we can see that. So our net credit here, we can see that we're collecting $2. 10, but spending $1. 10. So that leaves us with a dollar, and that dollar is the maximum reward. And you think, wow, we just cut our reward potential in half. That's true. But we also just dramatically reduce the risk in the trade. Because let's assume our trader who has the right to buy shares for $185 for whatever reason decides to do that. Cameron, give me those 100 shares at $185 per share. Well, if we needed to, worst case scenario, we could exercise our right to buy the shares for $190 and provide them for $185.
We don't want to do that. How often do we want to have to buy shares at $190 and sell them for $185? 85. Just we'd want to avoid that as much as possible, right? That would be a $5 loss against that $1 credit that was received that actually gives us our maximum theoretical loss. Let's spell that out. If we take a $5 loss on the stock, but we get to retain the $1 that was received as a credit up front for setting this deal up, that would be a $4 loss. That's it. Sharon says, would it be better to buy more contracts to the 185, 187, 50? Sharon, there are pros and cons to that scenario.
And what we will do when we've concluded our 10 introductory lessons in this webcast series, I'm just going to keep coming back on Tuesdays and we're going to be exploring things like that, Sharon, in greater detail. Hey, now that we understand what a short call spread is, what if we played around with the strikes? Or what if we went to a different expiration? How would that change the reward and the risk scenario? What would happen with the probabilities of the trade? But whether it's ultimately better really is determined on the back end of the trade. Did it work out or not? Yeah. Cool. So Mike says, oh, you're talking about some fundamentals. Actually, there's a great observation in that. And that is, how in the world, Cameron, did you choose Google?
Among the thousands of stocks you could have used as a demonstration, what are some of the characteristics that might have qualified this stock for discussion and not something else? Well, we've already talked about characteristics for stocks that on which traders choose to trade options. Some that tend to be more universal are price per share. Those considerations can be relatively broader ranging. Liquidity can, can, can be important whether we're trading bullish options or bearish options or combination strategies or whatever. But the fundamentals of the company for those who use fundamentals, that is examining the health of the company behind the stock. Well, if we're doing bullish strategies, maybe we want to do those on companies that the trader considers to be very healthy.
When we're doing bearish strategies, like we're talking about today, maybe we're looking for signs of weakness in the company. And that might be, you know, for some that might be a very high PE ratio. For others, it might be very narrow profit margins or shrinking revenues or whatever, you know, how are they define fundamental weakness that might play a role, but also just what, what's happening with the stock chart. For those that are more technically oriented, using charting to plan their trades, they might look for things like a break of resistance, a break of support like we saw today. Mike, yeah, no, good. It was, it was just a little sidebar that I caught my, you know, caught the corner of my eye, but it was actually a really good point that needed to be addressed.
So, but these are sort of the facts of the trade. Is this a high reward trade? It depends on how one defines high reward, but there is a smaller reward than risk on this trade. And yet for some traders, they're perfectly fine with that because the probability of success on this trade is going to be stronger than the likelihood of success on this trade. So, you know, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's a little bit of failure on this trade. So what do we need to happen? If we, if we set this trade up exactly how we've structured it, here's how it would look. Let me get rid of some of these lines. Let me just remove this drawing. So here's our broken support.
I'll just go ahead, right-click on that, extend that to the right, right up here is that 185 level. So that's where we sold a call. And then right up here is 190. And this is where we bought our other call. Let's draw in a line up there. So those, those two top lines, right? So that's where we sold a call. And then right up here is our broken support. So that's where we sold a call. And then right up here is our broken represent the actual position. And really, where we'd like to be with this trade is just below that, anywhere. It doesn't matter how far below, just below. We want to be down here. Look at where we are right now, because we're already so far away from the trade.
As long as it stays down here or doesn't rally back up, up into this trade, up, up into the position, this trade is in good position to make its maximum gain. So let's run through three scenarios. First of all, what if the stock stays below 185? So could go up a bit, but still below 185, could go sideways, could go down. But as long as it's down below 185, let's say, let's say we've even rallied up here to like 182 or 183. If someone has the right to buy shares from us for 185, but those shares are only worth 183, even though they have the contractual right to buy those shares, are they likely to assign that contract and actually buy the shares? Nope. They're probably going to say, Cameron, I don't want the shares.
They're not worth $185. And they'll say, keep my 210. At the same time, we have the right to buy shares for 190. We don't need them. So we let that contract expire, keep 210, lose 110. And that is our maximum gain of $1. And that's, that's the scenario. That's the outcome. If the stock is down below 185 to any extent, as we approach expiration. Now there can be rare exceptions, even out-of-the-money contracts can theoretically be assigned, right? But yeah, this is where we'd like to be as we approach expiration. Well, what if instead stock rallies up sharply? What if it goes up above 190 to some extent? This is where we didn't want it to go. This is a bearish trade. We don't want it to go up.
We want it to go down. Here's why. If it goes rocketing up to 200 and somebody has the right to buy shares from us for 185, are they going to do it? Yeah. With very rare exceptions again, they say, Cameron, give me those shares because I can go sell them for 200 bucks. And we think, ah, that's, this is rough. Got to sell shares for 185. In that case, we're going to buy the shares for 190, sell them for 185. That would be a $5 loss on the share. And we're going to sell them for $1. And we're going to sell them last 10 shares, the $1 collected to set this deal up is small consolation, and we have our $4 loss.
So that is the most likely outcome scenario, above 190 up here. So this is where we don't want to go. Let's put in our familiar red box up here. Let's edit the properties. Let's give it a nice pinkish color. There we go. So this is our no-fly zone. Well, there's one other scenario. What if we wind up in between? What if we wind up going up? Sorry, the chart's getting a little bit low. I don't want to draw a box. I remove that box. And let's switch up our drawing tool to a trendline tool. And let's say we get a rally. We didn't expect it to, but it goes up here to 187. Just somewhere in between. Dan says, how would you factor in the Greeks to this trade?
So Dan, I'm not going to go into the Greeks too much. In this discussion, but we did cover the Greeks in Lesson 5, if you want to go back and revisit that discussion. But if we're at 187 at expiration, someone else has the right to buy shares from us for 185. Are they going to do it? Yeah, they're getting a discount on those shares. So they buy the shares. Contract assigned. You might think, well, that's okay. Because we can buy those same shares for 190. Our contract says that we can. But do we want to? Even if we have the right to buy at 190, the shares are available on the open market for 187. No, our contract just expires worthless. We are required to deliver the shares at 185.
And then it's up to us to decide whether we buy to cover those shares. Bottom line here is if we're in between, the short contract gets assigned a long call, expires. Expires worthless, which means we wind up selling shares. Our covering position has expired. And we wind up short the shares. We wind up selling shares that we didn't own and that we didn't otherwise cover. We wind up in that short position. And now we're in a bearish stock position. And where things go from there is going to determine whether that just adds to losses or actually starts to help with things. So what might we want to do if we're in between the strikes or actually what might we consider as we approach expiration in any case?
Maybe we think about getting out before expiration. But particularly if we're up here where we're getting an elevated risk of assignment on that short option. Paul says, can you speak to exit targets? Yep, I can, Paul. So are we starting to get comfortable with how much we can make, how much we can lose, the likelihood of either one of those? If we want to put a number on this, let's use the green. I'm going to use the Greeks for just a second. We could go to the option chain. And I want to ask a basic question. What's the likelihood of ultimate success on this trade, maximum gain? What's the likelihood of ultimate failure, maximum loss? Well, that's one of the roles that Delta might play.
We know that it can tell us how much the stock, how much a contract can make or lose on a $1 move in the stock. But it also, if we look at it this way, look at the 185, it has a 28% Delta. Some people might just look at that and say, oh, okay, so that's about a 28%, now 29% chance that this contract is in the money at expiration. Or there's a 71% chance that that contract is out of the money. There's actually 71% probability of success on this trade as we've discussed it. If we look at the 190, there's only a 17% chance of that being in the money. Or in other words, the stock being a bump, above 190 at expiration, only a 17% chance of max loss.
That's why for some traders that look at this and say, hey, it's only a dollar compared to $4 I could lose, but there is a much higher chance that I make the dollar than that I lose for. And along the way, if things start to go the wrong direction, maybe I could consider exiting before the worst case scenario happens anyway. So, this is, let's summarize it. This is our short call spread. We can see why it's bearish. We don't want the stock to go up and lose $4. We prefer that it stays below 185 and we make a dollar. Let's also, let's see which direction I wanna take this right now. Let's talk about entries and exits, okay. At what point might a trader decide to get into something like this?
You think they're gonna do it on a stock that they think is where the company is extremely healthy and the stock is just going up and up and up? Probably not. They're probably looking for a stock that appears unhealthy, however they choose to define that, if they use fundamentals at all, or they may just go look at a chart and see something that seems to be going down. And what has Google been doing? Big gap down, took us down to an apparent support. We've broken below that level. And that is, for some, the definition, let me clean up some of these drawings. Let's just remove these. This fan here. Let's do this. Let's remove that one. Let's remove this one. Let's remove this one. And this one.
But for some traders, they look for a break of a price floor, just like we saw right here. We had a nice price floor, broke through that price floor, that's one potential entry signal. Now for others, they may look for a stock that has risen up to a price ceiling and is starting to bounce down. We've talked about bounces in previous lessons, but if we look at something like Tesla, look what's been going on with Tesla. It started back here after hitting a really sharp peak there in the middle of December, started, it worked out, it's working its way lower, making what we call lower highs and lower lows or just sort of stair-stepping downward. And what some traders will do is, as we're stair-stepping downward, they'll draw, either draw in a physical line or just imagine a line coming down.
And when price runs up to that apparent price ceiling and starts to bounce back down away from that, they call that a bounce entry. Let me zoom in on this. So here we go. So here's our downward sloping resistance. Price rallied up into that recently. We hit what we call a high day. That's the day that pokes its candle wick to the highest. We call that the high day. And then for some traders, they look for price to fall below the low of that high day and then close there. So a close below the low of the high day. That's our acronym here, CABLODE, doesn't exactly roll off the tongue, but that's what it stands for. Close below the low of the high day. And we got that right here.
That may have been an entry for some traders for a bearish trade like this. All right. So if that's the entry and the trader takes the position, how might they manage the position forward? What might be some of the exits? Well, for some, there can be a few potential exits. That's if the trade goes well and if the trade goes poorly. Really with our trade, let's go back to Alphabet. Let's just suppose the stock continues on downward and it's just going lower and lower and lower and it's making it less and less and less likely that the contracts are ever assigned. Well, ultimately the trader might just let the contracts expire worthless. So that could be exit number one.
Just let the contracts go to expiration, as long as they are out of the money and actually, the further out of the money, the further away from our strikes, the more comfortable the trader might feel in doing that. Now, another thing that they might do is not wait all the way to expiration because every day we wait is a day where the stock could rally unexpectedly, very sharply. So another thing they might do, let's go put in our trade and I'm gonna put in a second order to get out if we've made 80% of that $1 we were expecting. All right. So let's see, we've had the 185, the 190. Let me show you a quick way to place one of these trades. I'm gonna click on the bid price to sell the 185.
And then let me just minimize this 185 for just a moment. Click on the little down arrow. I'm gonna go to the 190 and hold down the control key on my keyboard while clicking the ask price, for the 190, the one that I intend to buy. So what that does is it stacks the 190 onto the 185. So we're selling the 185, buying the 190. Looks like it might be a 102 credit. Let's say we're willing to accept a $1 credit. Well, let's plan to get back out if it's making some money. What we'd like to see here is we're getting, we're getting paid a dollar to get into this trade. And we'd like to be able to buy back out of the trade at a lower price level. What if we were able to buy out of this for 20 cents? We got paid a dollar and I spent 20 cents to get back out. We'd be then realizing an 80 cent profit. And we don't know when that might happen if it ever does. But anytime between now and expiration, here's what the trader might do. Let's set up our single order here, change this little menu.
And I'm going to right-click on our first order and create an opposite order to get back out. Now, obviously we don't want to sell for a dollar and then buy out for a dollar. Here, let's try to buy out for 20 cents. And I'm going to make that a good till canceled order since I don't know, is that going to happen today? Is it going to happen a week from now? Is it going to happen a month from now? 20 days from now? But in any case, for some traders, they just like to predefine a minimum percentage return of the original possible return for an exit. In this case, this would be 80% of the original gain. If somebody said, you know what?
If I'm getting a credit of a dollar and I can buy out for half of that, 50 cents, maybe they set their limit at 50 cents. It's up to the trader to make that decision. But I'm going to go ahead and click confirm and send here. Let's sell this one vertical on a, by the way. So this one contract would be $100 that could be made, $400 that could be lost. In this webcast series, we've actually been risking up to $4,000. So let's do 10 contracts on both sides here. There we go. Let's click confirm and send. And we're going to send that order off now with a limit entry. There's never a guarantee that's going to fill. We'll see if that fills.
There are commissions to be considered on both sides, the entry and the exit here, but let's send that order off and we'll see if that fills. So there we are. We're asking for a dollar credit. Oh, we got it. We got a one-on-one credit. Okay. Now there's another scenario where the trader might choose to get out. So we've covered the trader might let it go to expiration. They may put it in order to get out with a fixed percentage of the original gain. Well, what if the stock starts to rally? Well, in that case, they might have to spend more than a dollar to get out. But as long as we haven't had expiration or as long as the stock hasn't rallied so severely sharply, maybe then get out for less than $4 and realize less than that maximum loss.
So yeah, if we start to break up above our resistance, or if we start to reenter the spread here, maybe the trader starts to consider getting out. We're not going to put on an order to do that today, but that's a possibility. All right. But guys, with that, we've actually accomplished everything that we set out to do today. I wanted to talk through this thing called a short call spread, and we're making combination strategies now. So I know that the first several times that somebody does this, it can be a lot to absorb. Don't feel, don't think, don't think. Don't feel like you're a failure because you're not catching every element, every implication of a combination strategy the first time. That's why we record these sessions.
You can go back and rewatch it, practice trading in paper, try to understand the pros and the cons, the obligations and the rights of options trades. I think you'll make rapid progress in understanding these strategies. So we've talked through what a short call spread is, we've talked through the management of the trade, and we've actually placed an example trade. So that has us ready for lesson nine. We're going to continue building combination strategies. We're going to next time do a short put spread, which sounds bearish, but it's not. This is actually a bullish strategy constructed using puts. So I hope you'll join me there in lesson nine. We'll wrap things up with a discussion of choosing a specific strategy, among all the ones that we've learned. So, Lesson 10 is a can't miss.
Everybody, thanks for giving me your time today; time for me to let you go, but as you do go, just remember, if you haven't subscribed to our Trader Talks channel yet, please make sure that you do. This is where we house our playlists of previous webcasts. You can also join our live streams here. So, go down and click on the subscribe button if you haven't done that already. It doesn't cost anything; it only takes a second to click that subscribe button. But also make sure that you're subscribed to Trader Talks. Make sure that you're following Connie and me on X. You can find Connie on X at Connie Hill CS. You can find me on X at Cameron May CS. It is the very best place to connect with your favorite presenters.
It's where we post stuff. Like right now, I've asked people to give me their thoughts on what they think is gonna happen on a chart next. Little interesting discussion. But in any case, yeah, if you have an X account, go give us a follow. That doesn't cost anything. But thank you for everybody who's already clicked the like button. I see over 170 people watching right now. 55 people have already clicked the like button. Thank you for doing that. That's very much appreciated. When you watch one of our webcasts, if you enjoy it, make sure that you have a habit of clicking that like button. It's like applause for your presenter. It also gives, it gives my webcasts a boost in the YouTube algorithm, helps more people understand these things called options. So that's a win-win. All right, everybody, I will see you in lesson nine next week. I have other webcasts throughout the week. Every day of the week, I have something new on the calendar. So look for those other webcasts. I'll look for you in those webcasts. 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.
