Hello, everyone, and welcome to Schwab Coaching. My name is Cameron May. I'm a Senior Manager of Trading and Derivative Education here at Schwab, and this is Getting Started with Options. And over the last nine weeks, we've been building upon a series of lessons that are intended to bring along a beginner trader from knowing nothing about this world of options to actually understanding a really solid handful of potential strategies. And today, we're going to be talking about, in Lesson 10, how a trader might choose among all of those strategies. We've actually learned nine strategies along the way. So which one might a trader apply and under which market conditions? That's a big topic. It can feel like a lot. We're going to try to boil that down.
I'm going to show you a little series of questions that a trader might ask themselves to try to narrow that field of potential strategy candidates. Before we can do that, though, let me first of all say hello to everybody that's already out there in YouTube chatting in. I've already seen some of you. Vincent, John, Susie. Hello to George and Mighty Mouse, Selva, Will, Ted, Paul, Eva, David, everybody else. Thanks for joining us week after week. We really do appreciate your attendance and your contributions to these discussions. Hope you've enjoyed Lessons 1 through 9. If you're here for the very first time, though, I want to welcome you as well. Even though we're kicking off with Lesson 10, that's okay. Hang around. You can go back and catch up on Lessons 1 through 9 if you like.
But I think you'll still enjoy the show. 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 a live discussion. This is a Tuesday webcast series, and we always kick it off promptly at noon Eastern time. We'd love to have you here in the live stream. I also want to point out, for the benefit of those who are here in the live stream, I have my very good friend, Connie Hill, hanging out in the chats with you. Connie's going to be addressing any questions that I can't get to just during the flow of the presentation. Thanks for having my back there, Connie. And Connie and I would also like to issue an invitation to you.
If you're not following us on X, if you have an account, give us a follow. It's the best place to connect with your favorite presenters in between these live streams. You can find Connie there, at ConnieHillCS, and you can find me on X, at CameronMayCS. All right. But let's get into Lesson 10, choosing a specific strategy. Out of all the strategies that we've learned, by the way, 9 isn't even close to an exhaustive list. There are actually dozens of potential option strategies. But this is a process, a potential process of elimination that might help you. It might help us select one. As we go to that, though, of course, we first need to consider the risks associated with trading. Risks are real. That certainly applies to options. So bear these important 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. It should not be considered an individualized recommendation or endorsement of any particular security, chart pattern, or investment strategy. Schwab does not recommend the use of technical analysis as a sole means of investment research. And investing involves risks, including the loss of principal. Ok, so a quick recap of Lessons 1 through 9. Here's our overview of the series to date. Started things off by discussing, through the first four lessons, the essential building blocks of every option strategies, every options strategy out there. Every strategy involves some combination of buying calls or puts, selling calls or puts, those four basic building blocks. So we went through those in lessons one through four.
Then we did a close examination of the pricing of options and how that might be measured currently and into the future using something known as the Options Greeks. It's an essential element of understanding options trading. Then we got into building combination strategies, and we learned four strategies, long and short call spreads, long and short put spreads. And that brings us to now we have this wealth of choices. How do we choose a specific strategy? Well, today's agenda, we're going to employ a little protocol that might help a trader narrow down that field of strategy candidates to one that just really seems to fit their outlook for market conditions. First of all, what we're going to be doing is introducing a series of three questions that a trader might ask themselves as they're planning.
To place a new options trade. Those questions might help them whittle that list of candidates down. Then we're going to take a look at market conditions and try to address those questions in sort of a simulated environment today. And that's going to lead us to ultimately, an example trade. So I think it's going to be a great discussion. Ted saying. Which to build exactly right. An iron condor, a straddle, a strangle, a butterfly; choices, choices, choices. Lots of additional strategies that we didn't talk about in this webcast. Here is right, Ted, because this one's just about getting started, but as an option trader learns more, they're going to have more choices, but that can feel kind of daunting. It can feel like too many choices. How do I narrow it down?
Well, even as we get a little bit more, I don't know, fancy with the strategies, the same protocol, the same process might be applied to pick among those. So let's go to the thinkorswim desktop trading platform. And I'll just park it here on the S& P 500 chart, but over the left, I want to start to introduce the problem or grappling with right now, just in this webcast series through the course of eight lessons. I know there was nine because we had the discussion of Greeks that wasn't actually spread strategy specific, but over the course of those eight lessons, we did, we did learn nine strategies. Now, some of those were bullish. So I want to outline those. We've learned some bullish strategies. We've learned some.
Some bearish strategies, and we even learned one strategy that's sort of bullish to kind of neutral. So I'm going to just phrase that this way. And there are definitely some, some strategies that are just flat out neutral. So what are some of those just to revisit those first eight lessons? Well, when we're bullish, we can buy calls known as long calls. We can sell puts or short puts. And we can do spreads along those lines. So we have long call spreads are bulls and short call spreads are short put spreads. There we go. For our bearish strategies. Well, we can buy puts, other words, long puts, we can sell puts or, or tell cell calls. I shouldn't be typing and talking at the same time, but that's sort of the, that's sort of the, the job.
So. So I'll do my very best and then we can do spreads along those lines. So we have long put spreads and we have short call spreads and it can be, it can be handy to sort of sometimes put these into these sorts of categories just to help one understand exactly what we're trying to tackle here. But finally, we do have sort of a neutral strategy. It actually has more of a bullish bias. I'll say that, but what is that? That was our covered call strategy that we learned. There you go. So we have nine different potential strategies to, to apply. Now, what I want you to do, let's look out here and maybe start to plan a new trade, maybe for the April expiration for those third Friday options.
Let's put ourselves in the shoes of a trader. And we have all of these strategies to choose from. Which one might the trader put on if that maybe they're planning to put on a new trade for April? Huh? Well, here are a few questions trader might ask themselves, series of questions. Question number one, are we if we're about to place a trade and some are bullish and some are bearish and some are neutral maybe the trader might try to establish for themselves whether they think the markets are more likely to be bullish or bearish or neutral for the timeframe of the trade. So are we going to do a bullish trade, a bearish trade, or a neutral trade? Question number two is with bullish, bearish, or neutral we have the ability to construct those by buying options.
We can do a bullish strategy but buying an option I could buy a call for example or I could sell a put. Now they're actually market conditions that are considered by some to be more of a buyer's market versus more of a seller's market. But we might want to ask ourselves whether we want to buy or sell options. And then finally, these first two questions are really going to narrow the field if we can feel comfortable in answering those. But we're still going to be left with a handful that will meet both of those, whatever our answers might be. So then we might do a little bit of a comparative analysis, a little side by side. Exploring the individual elements of each potential strategy. Now some of those strategies are going to be high reward strategies.
Some of those strategies are going to carry high risk or lower risk, comparatively speaking. And the probabilities of success or failure are going to change from strategy to strategy. So this is going to allow us to do a final comparison of our remaining strategy candidates. We're going to look at rewards. Rewards. Start potential, risk potential, and the probabilities of success or failure. So if we can do this, that trader might be able to make a fairly informed decision about which strategy to choose from all of the strategies out there. Now, even having done that, does that guarantee that we're going to have success? No, but we're just hopefully trying to improve the likelihood of success, right? So let's address this first question.
And I'm going to admit, sometimes it can seem a little bit clearer, other times it can look a little bit muddier. But how might we address question number one as we're trying to choose among these strategies? Are we going to be bullish, are we going to be bearish, or are we looking to apply a neutral strategy? Well, one way to begin to address this is to just look at a market index. I'm going to use the S& P 500 as the example index for this process, but not everybody uses the S& P 500. There might be some traders who trade primarily, let's say NASDAQ securities. And so they might look at the NASDAQ. But not everybody uses the NASDAQ. But let's look at the S&P and just acknowledge what's been happening.
It has been a great 12-month run for S&P 500 component companies. It has not been a great three-week run for S&P 500 component companies. If you look at where we were back on February 19th and where we are right now, we've retraced not quite 10%. What do we call that when an index goes down more than 10%? We call that a correction. Corrections are fairly normal business in the markets. They happen from time to time. Last I checked, it was about every 18 months or so. It can definitely vary. It's not like they're spaced out evenly. But we're not quite all the way to true correction territory right now. Instead, we're down about to today's low, about 9. 7% off of that high back on February 19th.
So as a trader attempts to address this, they might frequently look at a chart of an index and say, well, is it bullish or bearish? And I think there could be a case either way here. That's not uncommon. But the question isn't what have we done up till now? It's where do we think we're likely to be during the timeframe of our intended trade? Yeah. Ted says not quite to bear market yet. Yeah. Now, correction doesn't mean necessarily bear market either, right? That bear market, we'd actually need another 10%. But here's what some traders might be looking at. For some, they might look at these last three weeks and say, geez, it's clearly bearish. Maybe. Others, though, might look at this 9. 7% move and see potential in this for continued bullishness.
Because what happened the last time we had a 9. 7% scary sell-off here? This is just about proportionally identical to this move right back here, which was also a 9. 7% move. And if we decided to be bearish at that moment, it actually turned out to be one of the worst times of the year to get bearish. Because there was a strong recovery following this. So in some circumstances, a trader might have some difficult technical decisions to make. But I do want to say this may be, if you were to rank these in order of priority, which one might be the most important? It might be number one. Yep. Because if a trader can just get correct on the direction of most stocks out there, the strategy selection itself might be comparatively sort of academic.
Because if the stock market is roaring higher, are most shareholders likely to make money? Yep. Are lots of call buyers probably going to make money? Yep. Are lots of, let's say, short-put traders? Yep. Yep. Are lots of traders likely to make money? Yeah, they probably are. However, if we're doing those same bullish strategies and the markets persist lower, guess what? All those same strategies that seem so intelligent are probably going to be losing money under those conditions. So it can be an important decision. I'm going to make a judgment call here. That's what it always is. And let's just say until proven otherwise, let's say our trader thinks by April, maybe things calm down. And we have generally moved higher.
So it may not be the next day or two, but by expiration, maybe they see a stronger likelihood that the markets will be higher than lower. And so therefore, maybe their first decision is to do a bullish trade. Well, guess what that just did for the trader trying to decide among different options strategies. It just took a bunch of these off the table. Yep. What are we left with? We're left with this comparatively small handful of option strategies. It's starting to get a little bit clearer. The picture is clearing up. So we're going to move on to a question to here in just a moment. I, first of all, have to address something. Thank you, Ted and Eva, for pointing out that there has been a survey link that's been added to the chat window for the for the benefit of those who are here for the live in the live audience.
So if you're a live audience member, do me this favor, if you would. Click that survey link. Right now, that'll have it ready for you to fill out for after the webcast is over. You can give me some honest feedback, but if you've never filled out one of our surveys, I want to tell you a couple of things about it. Number one, it's a very short survey to multiple choice questions and then a comment box and a suggestion box. If you want to leave additional comments, but I will always say, though, is that if you take the time to fill out a survey, I gather that data and I read those comments. It all helps. So it's never wasted effort. Okay. So thank you for doing that for me. Definitely appreciate it.
But back to our decision. Discussion here, we've just narrowed the field of potential strategy candidates to now down from nine to four with one question addressed. Is it going to ultimately be the right answer? Time will tell. We're just trying to make our best estimate of market conditions and then go forward with a with a logical pairing of market expectations with an appropriate strategy. So next question, is it more of a buyer's market or more of a seller's market? You'll notice two. Two of our bullish strategies are long strategies, meaning they're primarily built on buying options. Two of our bullish strategies are short strategies, meaning they're primarily built around selling options. So how might we get an answer to this question? Well, what some traders will do is they'll bring up the VIX.
The VIX, if you're not familiar with it, is a chart of the anticipated volatility of the S&P 500. That's a bit of a mouthful. But just to sort of simplify this chart, some traders look at this as a chart of the general pricing of options. When this chart is high, they might say that prices on options generally are high. Not every option on every stock, but generally speaking, most options prices are higher. Now, let me ask a question. When we want to sell something, a house, a car, an option, do we want to do that while prices are high or prices are low? Yeah. Typically, when this chart is high, it's viewed as being more of a seller's market for options because premiums are literally at a premium.
When this chart is low, that's generally seen as more of a buyer's market. Now, it doesn't mean that we can't sell options while prices are lower generally and we can't buy options when prices are higher. We just have to understand generally how options pricing works. And there's a strong correlation. There's a strong correlation between expected volatility on the S&P 500 and high pricing of options. So, look at where we are right now on this chart. We are right here. And if I draw a line back through the last 12 months, you can see this is just about as high as premiums have been with the exception of maybe a few days back here in August. So, the experience for that trader will be as they go look at options.
On different stocks, they'll notice a lot of those prices are significantly higher. But these windows tend to be fairly short-lived with these higher prices of options. It doesn't mean they can't go higher still from here. That's definitely a possibility. But let's just say that our trader who has decided to do a bullish trade has looked at this chart and they see, oh, it looks like options prices are generally higher. That's more of a seller's market. So. We're going to do a bullish strategy for today's example. And we're going to do that by primarily selling. So, that's going to take the long falls out of the equation and the long fall spreads out of the equation. And we're left with short puts and short put spreads because both of those are bullish strategies.
They're built around selling options. We're going to find that as we go to sell puts, probably a lot of premiums are quite high right now. Got to say, the reason they're high is because the markets are choppy. There's more risk. And choppy markets. So, there's logic to why the premiums are higher. So, we have to be aware of that. Okay. So, now, we have a final question. We have two strategies here to choose from. Short puts and short put spreads. How do we make the choice between those two? That's going to come down to trader's preference to a large extent. Each of these strategies are going to have its own reward scenario. Each of these strategies are going to have its own risk associated with the strategy.
And each of these are going to have probability. And each of these are going to have probabilities that the trader might want to assess. So, let's look at a short put. And as an example today, and it's a little bit harder to find the bullish stocks right now. Here's one way. I'll just show you a quick way. If we go to the market watch tab and we go to visualize, I don't know if you're familiar with this tool. Typically, this is just going to default to what's called the heat map. And heat map can be useful. If we look at the heat map, this is showing us. If we select the S&P 500 in the left column, it'll show us the S&P 500 companies.
And the green ones are the ones that are having the best day. The red ones are having sort of the worst day. So, Verizon down 7%. Hey, look at this. Broadcom up 3% on yet another down day on the S&P 500. What if we were to go to the charts and look at what's going on with Broadcom? So, here's Broadcom. Broadcom is going to go down. Broadcom has had kind of a rough go along with a lot of the other stocks recently. However, maybe reversing course, what some technical traders might look at here, what they might notice is that there's an old price ceiling here that lasted all through summer and into the middle of winter for Broadcom. It seemed like prices couldn't get up above about $184.
And then, huge gap up. We've surrendered that 10%. So, we're going to go back down in territory and come back down to that previous price ceiling, but there's an assumption among technical traders, and that is that, commonly, previous price ceilings can act as new price floors, and that looks like what we may be getting right now, maybe finding some what we call support here. Let's say that our trader is bullish now. They think that this floor is likely to hold. Is it guaranteed to hold? Of course not. We could break right on down through again. But let's say that for April 18th. This is a month. Maybe one of the stronger looking stocks from a technical perspective out there, at least in that trader's view.
And maybe they think this is likely to go up from here. So, could it fit the criteria of a bullish trade scenario? It could. Well, should we do a short put or a short put spread? Let's look at a short put first. Let's go to the trade tab. Let's go. Let's make sure that we are on those. I just want to reset. I just want to reset. Let's go to the option chain here so you can see where I found myself. So, first of all, we make sure that we're looking at Broadcom. Then we're going to go to the 17th of April because that's the expiration we were looking at on our chart. Now, if you're wondering, Cameron, how did you choose a timeframe?
Well, generally speaking, sellers may be inclined to stay more towards closer to expiration. Buyers might get a little bit further out in time depending on how long they think a trade might take. But there can definitely be exceptions to that rule. I definitely know that somebody here in attendance, I know them. I know their approach. We're watching right now. And I know that they'll tend to maybe even sell way out here. That's okay. There can be differences of approaches in trading. But let's just say that our trader is trying to stay relatively close to expiration as they're looking to sell. Generally speaking, as we get closer to expiration, the time decay factor in the trading is going to be a little bit lower. And then an option will kick into a higher gear.
And the day-by-day decay effect will speed up and thereby maybe accelerating the profit potential of a trade on a daily basis for sellers of options. But in any case, let's say that we're looking at 17th of April. And we're looking to compare maybe selling a put versus selling a short put spread. Well, how about we look at the 17th of April? Let's look at with our chart again. So we had our support down here at 184. Let's see how much wiggle room we can provide this trade. Let's see if we can push this down here. Maybe look at selling a put down here on 175. That's below our support. As long as this price ceiling holds, or particularly if the stock starts to rise, we feel better about selling a put down here.
The objective there being hopefully the contract just expires. It's worthless. So as I go back to my trade tab, that 175 put looks like it's trading between $6. 50 or pardon me, $65 and $66.50. So now that we've seen all this, can you forgive me? We know that we're doing a comparison. Let's just take these off the screen. Just give myself some more room to work with. Okay. So we can do a sort of a side-by-side comparison. A comparison of two different approaches. So we have example trade A, which would just be a short put. Otherwise known as a cash secured put if we're doing it in a cash account. Compared to example trade B, which is going to be a short put vertical.
And some of you might even be thinking, oh, I know the answer to this one already. No, no, we don't know. Because some traders are going to choose A and some traders are going to choose B. Either one has its own potential merits and either one has its own potential risks. So let's say we sell that 175 put. You know what, I'm going to keep the numbers nice and round. Let's say we're able to get $6. 50 for that. So let's say we sell the 17th of April 175 put for 650. All right. Well, this has a specific reward potential attached to it, $6. 50. The theoretical max gain of this trade is 650. It's the premium collected. Now as we collect that premium, we know that we're taking upon ourselves an obligation.
Someone is paying us $6. 50 per share and in exchange, they have the right to sell shares to us for $175. If we don't want to buy those shares, the preference is for this contract to just never be assigned and just get to expiration and expire worthless, and we keep that $6. 50. That would happen if the stock were to go up with only rare exceptions or if the stock were to just stay above 175. Now RP says, how do you choose the delta? That's a good question, RP. So in this case, I didn't choose according to delta, did I? I said I just looked at the chart and we sold a put down below support. But I did choose the delta, which happens in this case to coincide with a delta of 27.
So what does that 27 mean? Well, if our objective is for this contract to expire worthless, one of the potential uses of Delta, Delta can mean a couple of things. It can tell us how much the option value can change on a $1 change in the underlying stock price, but it can also tell us an approximate likelihood that this contract expires in the money. Delta can also mean well, there's a 27% chance that this contract expires in the money. What do we actually want to have happen here? Though, we want it to expire out of the money and that means there is about there's about a 73% chance that this contract just expires out of the money and we make our $650, we realize that gain.
So, not only how much we can make but also the probability of making that much. Now you might say well, Cameron, I'd like an even higher probability. So in that case, what we'd look for is a lower delta. Lower deltas have a lower probability of expiring in the money, a higher probability of expiring out of the money, which is the objective of this trade. If we go for let's go let's let's say a 15 delta, that would have an 85% chance of success, but what's the trade-off? There's a lower reward for being successful. So there's a trade-off. If we with options typically the way it works is the higher the probability of success, the lower the reward for being successful. a trade and vice versa, so the trader just sort of looks for what what what suits their approach.
Let's say that our trader is looking at this chart and they're extremely confident that the stock is likely to go up. What might they do then? Well, they might say, 'I want I'm willing to take a higher probability of failure because I think this is really going to go up. So, I think the probabilities are underselling things in pursuit of a higher reward. That's fine, that's a decision they can make. Is it the right decision? Time will tell. Okay, so I'm willing to take a higher probability of failure because I think this is really going to go up. So there's our reward potential and our probability of success, well what's the risk potential? Well we know we've collected a 650 premium.
There is a an obligation associated with that someone has the right to sell shares to us for 175 so we know how much we might have to pay for the shares. We have no clue in this scenario how much we might ultimately be able to sell those shares for if we get stuck with a share of the stock with them at $175. How much can we sell them for? I don't know, depends on market conditions as of the moment those shares are assigned to us. This is actually a strategy with a lot of loss potential. If we want to put a number on that, what's the precise theoretical max loss of a short put? Well, if we have to buy the shares for 175 but we've collected a premium of 650 175 minus 650 leaves us with what?
188-650 = 168. 50. Let me know if I ever do math wrong in my head because I definitely do it from time to time, but 175 minus 650 is indeed 168. 50. That's how much could be lost on this trade. Which sounds, oh wow, is it likely to lose this much? No, it's still still just possible. How would we actually lose $168? 50 per share that's 16,850. Well, if the stock went to zero; if the stock isn't worth anything, but we're obligated to buy it for 175, that'd be 175 loss on the stock with you know a little consolation prize of six dollars and fifty cents for that we collected on the premium up front, that would leave us with that net $168. 50 loss.
There is not much chance; there's a chance just not much that Broadcom goes bankrupt or is delisted or whatever we get no value out of our shares over the next 37 days, that's close to zero percent chance that this actually happens but it's not zero it's close to zero but what it does mean is for this trade, if we do this and we're doing it in an IRA account, well, we've got to tie up $168. 50 if we want to sell a short put. And believe me, there are actually traders out there that are totally comfortable with this trade scenario because they may look at this and say, 'I think it's going up.' If it goes down, I do have an obligation. Someone can sell me shares at $170. But below $168, this is actually also our breakeven.
That $168 . 50 level is the breakeven for this trade. Let's draw that in. Draw a line right there. $168 . 50. I got a $168 . 41. That's close enough. But anywhere above this, anywhere up here at expiration, we're still in profit territory if we do the trade as currently constructed. If we drop down here, we're in our max loss but we're not in max loss territory; we're in loss territory and the further it falls, the more we can lose there we go and that just goes on down all right, so that's sort of the facts of this trade. So let's compare that to a short put. A short put spread it starts with this same let's and I'm going to be comparing this the same strike, just to keep it sort of an apples-to-apples comparison.
But with a short put spread, as we've learned, we sell a put at one strike and then we buy a less expensive put at another strike. Let's say that we do the 170 for our purchase so let's buy the 17th of April 170 put. Okay, and that looks like it's trading between 475 and $490. What's happened to Our price here, this has come down a bit, looks like it's really selling at maybe 610 to $620, yeah that's changed a little bit I'm gonna leave it at just because I don't want to mess with it while we're discussing this, but our long put let's say that we have to spend four dollars and eighty cents for that so this has an immediate impact on on the trade with the original trade we collected 650 and we get it and if we can just get to expiration have that expire worthless we make the whole 650 in this scenario we're spending more of that 650, so it dramatically reduces the reward potential of the trade. What's the theoretical max? Gain now
theoretical max gain is 650 collected minus 480 spent, that's a dollar seventy so way less reward potential right. What's the probability of success here? Well in either case, the maximum gain is best realized if the contracts are out of the money at expiration. In other words, if our stock is above 175 at expiration. Actually, the probabilities here happen to be identical; that's the same trade. If we have Trader A who sells a short put and we have Trader B who sells a short put vertical spread but uses the same short short strike, does the underlying stock care about either position that Trader A or Trader B did? Nope. It's either above 175 at expiration, in which case both scenarios are in max gain territory, or it's not, in which case neither scenario is, neither strategy is in max gain territory.
Probabilities of ultimate success are identical. So now you might think, ooh, scales have tilted here. It looked like this trade is, well, our short put vertical spread is inferior. We're just, we don't make as much for making exactly the same decision, exactly the same call on which way the stock is likely to go. However, we have to look at the other side of the equation as well. Where is the, what is the theoretical max loss? Well, with the, with the short put vertical, as we've learned, we have an obligation and we have a right. We have the obligation to maybe have to buy shares at 175, but we know worst-case scenario, we have the contractual right to sell those same shares for five bucks. So we don't have this huge downside exposure.
Instead, if we, if we do ultimately buy at 175 and sell at 170, that would be a $5 loss. So we don't have this huge downside exposure. So we don't have this huge loss, but we also collected $1. 70 upfront. That leaves us with $3. 30 that can be lost on this trade. So Trade A has $168. 50 that can be lost as a maximum. Trade B has only $3. 30. So this now starts to sound like, well, this is the obvious choice, right? Maybe not. Yes, this is spooky, but this is the obvious choice. So trade A has $168. 50, but there's almost no chance of that. This actually has a pretty fair chance. Something that's not negligible. In this case, for us to realize this maximum loss, really all we'd have to do is be below 170 at expiration. What are the odds of that? About 23%. About a 23% chance that we have our maximum loss. So one out of four times, we might lose this full amount if we were to just put the trade on and let it go all the way to expiration without any trade management and just see what happens. Yeah. So finally, what's the breakeven point for this trade?
And somebody says 27%. Did it change? No, it's actually, so it would be this one. It's getting below 170. If that 170, it's going to be below 170. If that 170, it's going to be below 170. If that 170 is in the money at expiration, that's where we hit our maximum loss scenario. All right. But our breakeven, here's a way to think about calculating breakeven on vertical spreads. Figure out where we need to be. In this case, this is a bullish spread. So we want to be above the spread, above 175, and figure out how much we can make. In this case, we can make $1 . 70. So if we make $1 . 70 above 175, well, if we're below 175 at expiration, we must not be making $1 . 70. The way it works out is, in this case, every penny that were below $1 . 75 at expiration, we're giving back a penny of our maximum potential gain. So our break-even on this trade is $1 . 75 minus $1 . 70, or in other words, $1 . 73. 30.
Now, as I walk you through each of these scenarios, the first time you do this, it's not going to be immediately obvious. You know, there's some math involved. But for more veteran traders, we can just do a quick, we can look at a new strategy like this. And we know, generally speaking, oh, I don't know how much I can make and how much I can lose on trade. And we know, generally speaking, I don't know how much I can make and how much I can lose on trade. And I mean, would this trade be amassable? So let's talk about trade A and trade B. You know what, I think I'm going to go with trade whatever, and they make their decision. The first few times, it may, you may have to just run the math very manually.
So we have $1. 73 a breakeven point here, we have a $1. 68 a breakeven point here, So a lower breakeven point on trade A, a higher breakeven point on trade B. So which one of these is the correct choice? It really just comes down to trader preference. So I'm currently going to conduct my daily edor with the futures of traders will say, you know what? I really think this is going to go higher. I want to pursue the highest reward I can. And even if it comes down, I'm getting that lower break-even point. So I'm going to go with trade A. Another trader might say, you know what? I feel pretty good that the stock is likely to go higher, but I'm willing to settle for a lower reward potential.
But at the same time, I get to reduce the risk of the trade and also just free up a ton of cash. So they might choose trade B. The cost of that is there's a higher probability of ultimate loss on this, and there's a higher break-even point. So there are pros and cons to each of these strategies. So in this example, I think what we will do, let's do this vertical spread. How do we place this trade? Well, a quick way to place this trade is we're going to do a vertical spread. So what we're going to do is we're going to go to the option that we intend to sell and click on the bid price. And then we go back up to the option chain and find the option that we intend to buy.
And while holding down the control key on our keyboard, click on the ask price to buy. And that creates that vertical spread. So you can see that this is now, let me just hide this. Looks like the credit might be $1. 35. What did we calculate? $1. 70. Prices have changed quite a bit as we've been talking. So we might not be able to pull $1. 70 out of this. Might be only $1. 30, $1. 35. But in any case, we could put a limit on that. Let's say that we're willing to settle for, let's say, $1. 35. You know what? Maybe even $1. 30. We click confirm and send. Going to attempt to sell that one vertical for a credit of $1.
30. That would be $130 on one contract, $370. Potential loss on that one contract minus the commission. But guys, that is a process of elimination. These three questions. Is it more of a bullish market? Do we see prices more likely to rise than to fall during the timeframe of the trade? Maybe the most important question. Is it more of a buyer's market or more of a seller's market? Question number three, let's look at the reward scenarios, the risk scenarios, and the probability that we're going to lose. So let's look at the reward scenarios, the risk scenarios, of success or failure, and then make that final decision. So hope this has really been insightful to you. This is a process that can really be applied to just about any strategy for options.
So I hope that's been eye-opening. And I really do appreciate if you followed me all the way through these 10 lessons. That's been fabulous. But don't stop. What we're going to do now is we're going to leave the 10 lessons on YouTube and then just start to apply these strategies going forward. And we're going to do a little bit more of that. So I hope that's been insightful to you. This is a process that can really be applied to just about any strategy for them and trading them and managing them along the way. So I hope that you'll just continue to join me in getting started with options here. But it's time for me to let you go. And as I do, a couple of things that I'd suggest that you do.
Number one is to make sure that you have subscribed to the Trader Talks channel on YouTube. You can go right now below the video right now, click on the subscribe button if you haven't done that already. It doesn't cost anything. It only takes a moment. But YouTube is where we house our playlists of previous webcasts, and you can join our live streams right here. For example, if you want to find the playlist for the nine lessons that we've already covered, you can click on playlists here, scroll toward the bottom. Mine happens to be down toward the bottom. Look for Barb because she used to teach this webcast series. But there it is getting started with options. And I can click on view full playlist. And there are those nine lessons.
Right now, another thing is make sure that you're following us on X. If you have an account with X, follow Connie. Follow me. You can find Connie there at Connie Hill. You can find at Connie Hill CS. You can find me on X at Cameron May CS. But that's the best place to connect with your favorite presenters. So, there's my handle on X. That's what my profile looks like. So you'll know you're in the right spot. Just make sure it's at Cameron May CS. Give it a follow. But this is where you can see. More current views of what's going on with the markets when there aren't live streams going on. And a final thing I want to note is thank you, everybody that's already clicked the like button.
There are 152 people watching at the moment. 72 have already clicked the like button. That's definitely appreciated. That's fabulous. That sounds like applause to me. It also gives my webcast a boost in the YouTube algorithm. So more people find these lessons, more people get to learn about trading options. If they have an interest in it. Hey, go fill out that survey now. Thanks, Connie, for reposting that. Thanks for helping Connie there in the chats. Everybody go enjoy the rest of our of our webcasts. I'll look for you in a future webcast of mine. I'll also look for an X. But whenever I see you again, until that moment arrives, I wish the very best of luck. Happy trading.
All right. Thanks, guys.
