Hello everyone and welcome to Schwab Coaching. My name is Cameron May. I'm a Senior Manager here at Schwab and this is Trading Covered Calls and Short Puts. And today we're going to be going through planning and placing a covered call in just five steps. We're going to be doing it on a thinkorswim platform. We're going to include an example trade. It should be a great discussion. We're going to get to all of that in just a moment. But let me first of all say hello to my YouTube live stream audience. Great to see Barry and Karen, Ray, Dragon Rider, Bob, Joe, David, Paul, Lee, Will, everybody else. Thanks for joining these webcasts week after week. We really do appreciate your attendance and your contributions in 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 show, but be aware that you're invited to join us in the live stream. If you'd like to be here, this is a Monday webcast series. It kicks off promptly at 2 Eastern. If you want to be here, it'd be fantastic to have you. And I want to let you know that my very good friend, Barb Armstrong, is joining us here in the chats. She's going to be addressing any questions that I can't get to. Barb is a fabulous instructor herself. She's done this series in the past or participated in it. So thanks for being there, Barb, providing that support.
And Barb and I would like to issue an invitation to you. If you're not following us on X, please do that. It doesn't cost anything. You can follow Barb at Barb Armstrong CS. You can follow me there on that platform at Cameron May CS. That is the best place to connect with your favorite presenters in between the live streams. And everybody knows if you follow Barb, what a fabulous job she does on X with her posts there. All right, but let's get into this. And as we do, of course, the first thing we need to do is pause to consider the risks associated with trading. It certainly applies to covered calls and to short puts. So this is important. Information 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. Investing involves risks, including the loss of principal, and any investment decision you make in your self-directed account is solely your responsibility. Okay, so with that accomplished, let's set the agenda for the day. I do want to take a quick peek at the S&P 500 and just sort of set the stage for why a trader might be considering a covered call in these sorts of conditions. But then we're going to dedicate the bulk of our time to discussing planning and placing a covered call trade using five steps.
So, I'll walk us through the five steps, and then we're going to plan an example trade at the end. So let's go right to Thinkorswim. Started off with a quick review of the S&P 500. It was a great 2024. 2025 is not often too bad of a start. A little bit up, a little bit down over the course of the last two-ish trading sessions. The S&P has climbed a bit, fading a little as we move toward the middle hours of trading today. But I think for some of you watching, I think some of you might relate to this. Yeah, it's been a great run, but it also seems that there might be a little bit of a price ceiling here on one of these major market indices that could have some traders thinking, 'I don't know if the timing is optimal.' If they're technically oriented and they look at this through this lens,
they might say, maybe stocks are going to peel back down to support a little bit, come back down to price floors. In the short term, that doesn't really lend itself, if we have that outlook, to assuming great appreciation in the value of our stocks. So does that mean that we just avoid stocks entirely? Or is there another way that a trader might look for some productivity from stocks in their portfolio? That's where they might recruit something like a covered call. Now, this is not a sales pitch for covered calls. This is just a set of conceptual scenarios for that strategy. And also, I just want to explore the pros and the cons and how might one plan and place a trade using covered calls.
All right, so whatever your own personal convictions are regarding the market outlook, let's just say that our hypothetical investor thinks overall looks good, just maybe in the short term. Not technically terrific. So maybe they're thinking about doing a covered call. So let's go plan and place a covered call. And I want to outline five conceptual steps. Now, the first thing I'm going to do is lay out those steps in my scratch pad over here. And I'm going to abbreviate these to just some key words, okay? So it's going to be number one, stock. Number two, expiration. Number three, strike. Number four, importantly, exits. And number five, we're ready to place that trade. And we want to make sure that we know how to do it in today's platform and to be using Thinkorswim desktop.
All right, now we'll have more people chiming in. Some names aren't terribly familiar to me out there. So it's great to see everyone, whether I've seen you in my other webcast live streams, or maybe this is your very first time joining us. It's great to see all of you out there. Thank you. keeping an eye on those chats. And I'd love if you have questions, if you think I'm missing something here, chat in, let me know, and I'll try to work it into our discussion. All right, but step number one in planning and placing a covered call trade for a trader is to select a stock. Now, a concept that I have in the back of my mind for a typical covered call trader is that it's a strategy that's commonly done on stocks that a trader loves to own, but they're ready for a breakup if it happens.
Because if we do a covered call on a stock that we are in love with, and we do not want to lose from our portfolio for whatever those motivations might be, this might not be the strategy. So that might be right up there at the top of the list. Good stocks that we don't mind owning, but stocks that were okay if they wind up being sold to somebody else, because that's part of the process of trading covered calls. So, what sorts of stocks might traders look for? What might characteristics of something that I just sort of roughly described, what might those look like? Well, common characteristics or pre-qualifiers for stocks, number one might be that the stock is of a certain size, like large stocks.
Not every covered call trader always prefers larger companies, but when we have smaller companies, they tend to not have terribly large float. So, if we have a covered call, we might want to have a covered call. And that can lead to considerably liquid options, and that can cause issues with the pricing. It can make it harder to get into and out of options trades. It can make the whole scenario more difficult. So, a first consideration as we go start to build a scan for some potential options candidate or covered call candidates, is the size of the company. So, if you're not familiar with Thinkorswim Scan tool, we're just logged into Thinkorswim Desktop. I'm going to go up here to the scan tab, and we're going to go to the stock hacks.
Thinkorswim is a very good tool, Now, I'm going to be selecting from these drop-down menus, and the first one here next to the stock category, we're going to look for market capitalization. Market capitalization is just the size of the company. If you have a $100 stock that has a million shares that are trading, that's basically a $100 million company, and we call that a $100 million market capitalization. Now, 100 million sounds like a lot. It's not very big in the grand scheme of the U. S. marketplace. So a big company might be, and there can be some flexibility here in the definition, but how about we do a scan for $50 billion or larger companies? Now, when we're doing a scan, you'll notice it says market cap in millions of dollars.
So if we put in 50,000 million, that's the equivalent of one billion. And as we're building out this scan. Now, if we do a scan for an example stock, I'm going to hide the left column over here for just a moment. We'll open this back up so we can see that scratch pad in just a second. But there we go. That just allows me to see the rest of the scan. Now, as I enter that $50 billion as my minimum for the market capitalization of this company, you can see only 476 companies out of the thousands of potential matches actually meet that criteria. There are actually, if you can believe it, almost 500. There are 500 companies out there that at least $50 billion in size or larger trading on the domestic exchanges.
So that's one consideration. As I go through this list of potential pre-qualifiers for the kind of stocks that a trader might look for to trade covered calls on, I'm probably going to miss some that you think are important if you're a covered call trader, if you're a stock investor. This is not intended to be a definitive or an exhaustive list, but what I do want to do is show you the tools that are available. And then you can come in, if this is your thing, and create your own scan for stocks that fit your own criteria, in any case. So size of the company can be a big consideration for a trader. Also, maybe the trader sees the covered call as, yes, an income strategy.
So maybe an income emphasis is a point of importance for the trader. And why not just look for, or maybe our trader is interested. Maybe he's interested in stocks that also pay a dividend, a second potential stream of income. So let's go down to dividend yield. There we are. And let's put in a minimum here as our scan criteria. An average U. S. company that does pay a dividend is actually paying a little bit under 2% right now. Let's say their trader wants to see above average. So I'm going to set as our example today, out of our $50 billion companies, we only want to see those that are also paying a 3% or lower. We want to see those that are actually paying a larger dividend.
Okay, now a final characteristic that we're going to add to our scan. So you can see this, well, that's not a very big scan camera, only three characteristics. Yeah, I'll talk about a few others that might be used here. But a third is the volatility of the company's stock. It's quite typical with covered call traders, while they're waiting for their contracts to expire, they don't necessarily want to see their stock racing up and down and giving them high blood pressure. Maybe they want to see stocks that are a little bit more stable. Well, a measure of volatility that can be found right here in our default menu using the scan function is called the beta. So I'm going to go up here to beta, which is a measure of how volatile is this stock compared to the S&P 500.
And if our stock just tends to move right in step with the S&P, we'd say it has sort of a one-to-one relationship or a beta value of one. A beta above one implies higher volatility than average. A beta below one implies higher volatility than average. A beta below one implies lower volatility than average. So how about for our example here, let's put in 0. 8 as our minimum. I'm actually going to put in 0. 8 just because I like to be grammatically correct, even though it doesn't matter. But what does that mean? So if we have a beta value of eight, it means our stock tends to be about 20% less volatile than the S &P 500. Now as our maximum, I'm going to go all the way up to 1.
5. That means that we're allowing for stocks that are even 50% more volatile than average, but we are putting a cap on it. So we can understand why a trader might be putting a cap on it. If they're trying to avoid those highly volatile stocks, putting a cap on the beta requirement might make some sense. Putting a minimum there might be a little bit less intuitive. And that might be because our trader recognizes that extremely stable stocks tend to be more volatile and have a lot less partisanship than our average trader. So it's important to not have much premium for our covered call trader. Options buyers are just not willing to pay high premiums on stocks that aren't expected to do much. So Ken says, you just got on what platforms Cameron using on this demo.
Thanks for asking the question, Ken. This is known as think-or-swim and specifically, it's a think-or-swim desktop software that can be downloaded from your Schwab online account. In the menu, thinkorswim, just click on that and you'll figure it out. Okay. So there we go. So this is a very basic scan, but there are other things that a trader might keep top of mind as they're considering stocks to do covered calls on. Now, what might those be? They could be any sorts of other fundamentals. We have other fundamental searches that can be done here. We click on the right thing here. I wanted to click on add filter, but we could add fundamental filters where the where the the trader is, is maybe sorting for value indications or growth metrics.
We can look for technical indications of strength, which we are going to do with our example candidates here. And also for some companies or for, for some traders, they might really have an emphasis on which sector their stock belongs to, because if they're doing covered calls, let's say they have a hundred thousand dollar portfolio and they have the full 100 ,000 dollars and it's strictly in, let's say financials. Well, that might be dialing up the risk of the portfolio, lacking diversification for some, that'd be okay. But for others, they might prefer to spread across a range of sectors. So we'll keep an eye on that as well, but let's just do this. Let's run our scan for our companies, $50 billion companies, not terribly volatile, not incredibly stable, just sort of in the middle there that are all paying at least a 3% yield.
And as I click scan, there we go. We have our list of candidates here. I'm just going to look down through this. And by default, this is going to come up with whatever we listed here first. So it's emphasizing market capitalization. I can see some big companies in here, Citigroup and ConocoPhillips. How about we have a look at Citigroup? Ambrose says, why the max cap? On what, on which one Ambrose? Were you referring to the, the beta or the yield or? Oh, so Bob, that's a great question, Bob. Is Cam performing a scan? So this is a different way of describing a covered call, where we don't own the stock yet. So the intention is to buy the stock and then sell or write the call at the same time, buy stock, write, call, buy, write.
Yeah, that's what I'm doing because I'm kicking off a new series. I don't actually own any stocks in this example portfolio, but yes, this is this, this is sort of the first step. If a trader wants to do covered calls, well, they got to have something to cover the call. Calls they intend to do. Yep. So that's where we're starting here, Bob. Good question. But how about we go have a look at Citigroup? Now, bear in mind, Citigroup, if you don't know, by the way, let me show you something here. You can add your sector as one of the columns here. There are lots of ways that you can confirm the sector. Another thing that you can do is just go to the analyze tab and bring up the fundamentals page, type in your company here, and you can see right there it says financials.
Other ways I could show you, but that'll suffice for now. But we know Citigroup. All right. We know that's in the financial. I think most people would be aware of that. But I mentioned that among the characteristics that a trader might be looking for as they're just working on step number one is what's happening technically with the stock. And rather than running a scan for some really fancy technicals, how about we just bring up a chart? Of one or two or three of these companies, and we just look at what's going on. And our trader might look at this and say, well, it seems from a fundamental perspective, the size of the company, the yield that's being paid, the beta, all of those planets seem to be in alignment with what the trader has expressed as their preferences.
But they might also see, oh, well, this is a stock that's been going higher and higher and higher, seems to be thriving in today's market conditions, whatever they are. And even look at this, for those of you who are more technically oriented, a bit of a possible symmetrical triangle here that we just broke out from. Now, it doesn't mean that every covered call trader looking for a symmetrical triangle, but they might be looking for chart strength, however they define that. And they might even specifically be looking for bullishness in the day they're planning to place the trade because it is, we're buying a stock. Might as well be bullish on the stock that we're buying. Bullishness tends to be positive for stock shareholders, including those with covered calls.
So yeah, let's say that Citigroup is ticking all the boxes. It looks like the kind of stock that the trader might be looking for. Now, I know I missed some things that some of you might say, oh, it's not that list, Cameron, that you just provided, market cap, yield, beta, fundamentals, technicals. That's not the way that I do covered calls. That's okay. I'm just saying, trader, first of all, needs to pick a stock, whatever their method is for picking a stock. Now they're ready for number two, which is to go enter into the covered call contract. If you're not familiar with covered calls, what we're doing here is as conceptual owners of shares of stock, and we're going to be buying a certain number of shares, depending on the size of one's account, we just tailor it that way.
But we're going to go get into an agreement where someone else is going to have the right for a period of time to buy those shares from us. Okay. So let's go work on step number two, which is to begin to outline the terms of our contract. First of all, we're going to look for an expiration. How long-term of a contract are we going to get into? So when we go to the trade tab and we type in our symbol here, we can see all these contracts down below. Some that are only four days long. That's what the number in parentheses indicates. Some that go out years. How far can we go with Citigroup? Out 892 days, almost three years. So how long should a trader be in a covered call?
It's up to the trader, but there is a bit of a balancing act that's typically pursued here. One consideration on the one side of the equation is the trader's looking for enough, bit of a flexy, sort of a squishy term there, but enough premium from the contract that they're selling to make it worth their while. But also they're balancing that against, well, but how long do I want to sit around to make it worth my time? There tends to be a trade-off. Shorter-term contracts have smaller premiums. Longer-term contracts have larger premiums, but we're in the contract for a longer period. And sometimes traders will say, well, it tends to be, and this is only for some, but they'll say there can be a bit of a sweet spot between 20 days and 50 days.
Less than 20 days, the premiums can be fairly small. That can be okay for some, it might not be adequate for others. Beyond 50 days, premiums are larger, but they're with a comfortable downside on a premium. So I have a hedge that's, but the trader is stuck in the trade for so long waiting for the time decay in the contract that it's just basically giving the stock too much time, too much time to misbehave. Okay, so that's conceptually sort of the balancing act that we're trying to strike here. But let's see what might fall within that range. Okay, we do have, I'm gonna look at these numbers in black. Black, nothing inherently wrong with the ones in purple. Those are our weekly contracts. The weekly contracts just tend to have a little bit less liquidity.
But these monthly contracts, the traditional third Friday expirations like the 21st of February or the 17th of January, they tend to be the more heavily traded options. They tend to have greater liquidity. They tend to have narrower spreads between the bid and ask prices. So how about in this webcast series, you're probably gonna see me use those more than the others. But I just wanna emphasize, there's nothing inherently wrong beyond that with the weeklies. Okay, they just can't have some liquidity issues. So I'm gonna go to the 21st of February. That has 46 days till expiration. And I've selected my expiration, which means that I can now move on to my step number three, which is the strike price. If you haven't done a covered call before, I mentioned that we're gonna be getting into a contract with another trader out there.
And the deal here is we're agreeing that the other trader will be able to buy; it's just conceptual this way. It's not like there's some trader out there named Joe or Jane, and we're getting into a one-on-one contract with them. But it's just easier for me to talk about like one-on-one scenarios, right? But conceptually, what we're doing here is we're gonna be agreeing for a period of time, 46 days in this case, someone else is gonna have the right to buy our shares for a specific price. That's what we're gonna be choosing. But in exchange, they're gonna pay us for that right. So let's look at the 21st of February. And down the center, we have all of these, what are called strikes, the price at which we can strike a deal with the other trader where they get to buy the shares from us.
So how might the trader choose a strike? Well, again, there's a balancing act here. And the balancing act, among some of the considerations, some quite important considerations, are, well, what price does the other trader get to buy my shares from me for? Is it higher or lower than the price that I'm paying? And how much are they paying me for that right? Teeter-totter effect. If I require the other trader to pay me a higher price for the stock, they're going to pay a lower price for that right, a lower premium. So for example, let's look at, let's look at, oh, let's look at, let's look at the $75 contract. The stock's trading right now at $73. 24. So let's assume that we're able to buy our shares of stock for $73.
24. And then we strike a deal where someone has the right to buy those shares from us for 75 bucks, just a little bit more than we're paying for those shares. So if they do buy the shares, we're going to be selling those at a little bit of a profit. Well, right now, the going price, the premium for that is about, you know, $1. 88 to $1. 90. You'll just call it $1. 90 for simplicity's sake. So someone's paying us $1. 90 for the right to maybe buy our shares from us for 75 bucks. It's up to them whether they ultimately do it or not, but they have that right for the next 46 days. Well, let's compare that.
If we notch that up a bit, I don't want me, let me get rid of that. I didn't mean to open that up. There we go. In any case, let's compare that to like the 77 and a half call. Here we're striking a deal where someone has the right to not buy our shares for $75. We're requiring that they pay us a little bit higher price, $ 77 and a half dollars. It's not such a good deal for them. So they may not, but might not be willing to pay us as much to lock in that deal somewhere between $1. 06 and $1. 09. So the income from doing this isn't as high, but the appreciation potential is higher. So let me throw out a question for it.
I want your, I want your input on this. Chat in, let me know if this were in your paper money, which strike might you choose for my example trade? Is there a right or a wrong answer here? Could we have just gone with some other strikes entirely? If you think it should be some other strike, chat in that strike. Yeah. But I think you're going to see it's, it's going to vary from one trader to the next, which strike they choose. Now there are some general rules of thumb that some traders might employ to assist with making that decision though. One of which is, well, you know, if you go too high, if requiring too high of a strike price that the other trader has to pay, that premium just really dwindles into, it's not really maybe even worth it.
Faye and Barry and Sharon, Lisa are leaning towards 77. 5. Dave, John are saying 75 bucks. Rick is saying, 'Hey, $ 80 looks okay to me.' Rick's saying, 'I'd rather sell the stock at 80 bucks.' Look at this on a chart. That would be, wait, where is 80? That'd be way up here. You're telling someone else, 'Yeah, you can have my shares, but you're going to have to pay me 80 bucks for it.' I'll say, 'Well, okay. It's probably not going to work out for me. So I'll give you a little bit of money, a smaller amount of money, right? Yeah, 60 cents, about.' But for Rick, that sounds like that would be a quote, unquote, adequate return. Now that's going to vary from one trader to the next.
My point here is not to say that one is better than the other. It's kind of nice that it can be flexible, but for some traders, as a rule of thumb, they might say, well, can I get at least a certain amount, half a percent, 1% of the stock price. So let's say a trader has the rule that the premium has to be at least 1%. On a $73 stock, that would be 73 cents. So 77 and a half could qualify. And I think for today's example, why don't we do that? Let's do the 77 and a half. It looks like it's trading a little bit over a dollar. That would be about 1. 5% ish for the premium. That's the strike that we're going to go with.
So we've selected our stock. We've selected our expiration. We've selected our strike. Now we have to plan our exit. And I want to go to our chart again to illustrate some of the considerations that a trader might have in mind as they're planning this part of the trade, right? The reason they're considering the stock, they already have sort of an entry in mind. Oh, we're buying it because all of the fundamental characteristics were in line. It's in the right sector for this hypothetical trader. It seems to be behaving appropriately as far as they're concerned today with the stock price movement. But I'm going to draw in a line up here at 77 and a half, just to show you, let's go all the way up here to 77.
77 and a half ish right there. That's close enough. And I'm going to carry that out to our expiration date, out there, February 21st. That's, that 46 days from now. So what this represents is if someone else buys our shares from us, this is the price they have to pay. Now, if the trader is okay with that scenario, let's walk through some scenarios here. Let's think about how we might plan our exits. What if our stock goes wrong? Our stock is rocketing up and it goes up above $80 and it hits expiration. Someone else has the right to buy shares from us for 77 and a half. Are they going to do it? Yup. With very rare exceptions, especially at expiration, those contracts are going to be assigned and we wind up selling our shares for 77 and a half.
And we say, oh darn it. We bought it for 73 and a quarter-ish. We'll see what we can get a feel for. But if we buy it 73 and a quarter and we sell it 77 and a half, I don't know about your math, but mine says that's a $4 and 25-cent profit on the stock. Plus we have their $1. 08, $1. 09 that we collected as a premium. So that's an over a $5 realized gain in that scenario. So let me ask you this: If the trader gets assigned and they get called out as the term that we use, is that a bad thing every time? Because I know it feels like sometimes we get the impression that having our shares called away, getting called out is a negative outcome.
Not always. Nope. It can be if the trader didn't actually intend to ever sell the shares. You can have lots of reasons. Traders can have lots of reasons they don't want to sell their shares. This is a strategy that requires the potential at least that shares will be sold. So, be aware of that. That from the moment we enter into this covered call, as long as we're in the call, we are not in control of the fact that the trade might get assigned, as long as we're in it. Yeah, Barry and Sharon, not necessarily a negative outcome, but again, some might see it that way. So what might be a plan for exit for either? Let's say our trader is okay with the contracts being assigned.
There may not be anything that needs to be done here. Stock is going up, who cares? Let the shares go. If the stock has gone up above our strike and the trader really doesn't want to be assigned, they may choose to buy out of that call at that point. Now, as long as the call is liquid, trader should stand a good chance of being able to get out. Liquidity is a point of emphasis in these sorts of trades. But it doesn't mean that they're getting out at a lower price. The dollar that they received to get into this deal, it might have to pay more than that to get out of it. But it allows them to keep the shares and keep the appreciation in the stock price when they do that.
Chuck says, if you don't want to sell the shares, don't sell the call. I think that's a healthy way to see it, Chuck, because I think for some traders, especially those that are new to this strategy, they think, well, I'll just nurse it along and make sure it doesn't get called out. We're not in control of that. Even an out-of-the-money call can get assigned. Even if the stock hasn't gone above 70, even if the stock hasn't gone below 77 and a half, the other trader might just get a wild hair and say, you know what, I want camera shares anyway. I'm going to buy those shares. Once again, they would have to pay 77 and a half dollars to do that. And we get to keep their premium.
So that would still be a profitable outcome, but it does mean that the shares are no longer in that trader's possession or whatever the consequences of that might be. So, all right, so that's one scenario. What if the stock does this? Let's activate this drawing and let's say it doesn't. It goes up, but it doesn't go above 77 and a half. Let's say it goes up here to 75 or 76 or whatever. Well, in that case, someone has the right to buy our shares at 77 and a half, and they're not worth that much. They really don't have a strong motivation to do that, especially with no, there's not a dividend that's scheduled between now and expiration. So there's not even a dividend to motivate them to buy the shares so they can get the dividend.
So let's say that they won't buy the shares. That does not guarantee that the stock, that the other trader won't overpay for the shares. They can do that if they want to. In that scenario, I think there'd be plenty of traders who say, 'Twist my arm, overpay me for my shares, okay.' But if we're below our strike price at expiration, most likely the other trader just walks away. Says, Cameron, keep your shares. They're not worth my 77 and a half dollars. And so we keep the shares, we keep the premium, and a trader just walks away. The trade is done. Well, what if the stock does something else? And that might be the scenario. Actually, let me not draw another line. It can get kind of cluttery if I do that.
Let's remove this. Let's remove this drawing. What if the stock starts to collapse? Well, this is a burden that we primarily have to shoulder. Sorry, I just thumped my microphone for just a moment. But the trader, the owner of the covered, covered call, let me phrase that this way. We own the shares of stock, right? The Citigroup. Another trader has the right to buy our shares if they want to, but if those stocks are, if these shares are collapsing in price, they're only worth 65 bucks. Even if someone has the right to buy those for 77 and a half, are they gonna do it? No, it's unlikely. They could, just getting really unlikely at this point. The other trader probably walks away from the deal.
And so we're stuck with sort of these, you know, poorly performing shares that we bought for 73 and a quarter. They dropped in value dramatically. And we have a dollar or whatever left over as a consolation price. This is a good point for why traders typically do this on stocks that they think are going up. If we think that the stock is gonna collapse, what's a better course of action? Most likely avoid the stock. Or if we own it and we think it's just gonna go down in value, we might just sell the stock. Because watching a stock fall, what would that be? Eight bucks in my example here? If it falls eight bucks and we only collected a dollar of consolation prize, that's still a losing approach.
So a trader, if our stock is collapsing after we get into this deal, they may have a plan to pull the plug and say, 'I don't wanna be in this deal anymore.' Greg, you're getting a little bit fancy for me. I'm not gonna go that way. That's one consideration. But no, the plan here might be, this is one way that a trader might look at it. I own the stock, and yes, I've sold a call, but the trader probably doesn't wanna hold onto the stock just because they're in the call. Instead, if they no longer wanna be in the stock, if it's just getting too brutal, maybe buy out of the call, probably pennies on the dollar for what we got into it for.
And then, which is a good thing with a trader, with a call when we sold it, and then get rid of the stock. So let me illustrate this. Let me just remove this drawing. Let's remove this drawing. And maybe our trader looks at this chart and says, you know what? As long as that stock stays above that support, I'm okay. But if we start to really break down and fall below that support, maybe their technical outlook for the stock has changed significantly. They no longer wanna own the stock, they don't care about the availability of call premium that might be collected, and they just wanna get out. So what would that be in this case? That looks like that's about 67 and a half.
Let's say if the stock gets down here at 67, the trader says, that's far enough. I'm gonna pull the plug. I thought it was going up. I thought maybe I could make some money on this deal. I'm losing money. Let's get out. So let's now, so now we have a plan for if the stock goes up, hey, we can, we either have a plan to exit if we wanna retain the shares and we haven't been assigned, or maybe we just wait and get assigned. If it goes up, it doesn't go above our strike and it just expires worthless. That's another possible outcome. If it's stock starts to collapse, that's not so good as the owner of shares. So maybe we'll get rid of those shares. Let's put a stop in place.
Stop the bleeding on this. So let's go place our trade. Now, if you haven't ever placed a covered call trade on thinkorswim, there are a number of ways to do it. Here's one way, okay? We're gonna go to the trade tab, type in our symbol, go down to the expiration that we selected, go to the strike that we selected, 77 and a half, and then right click either on the bid price or the ask price. It doesn't matter which. I'm just gonna right click and I'm going to buy a covered stock. Covered stock is just thinkorswim's phrasing for covered call. If I select that, you can see, and by the way, I'm gonna close out this left, but you can see that we've accomplished all five steps.
Select a stock, select an expiration, select a strike, plan your exits. Now we're just working on step number five, placing the trade, okay? Let's hide that left column just so we can see this order field a little more clearly. So when we right click and we select buy covered stock, it brings up an order to buy a hundred shares and to sell one contract. Now for this webcast series, I'm dedicating $100,000 in paper money to this series. And let's, I think I'm gonna do, let's do 10% per trade. So that's $10,000. Well, net, if we buy a hundred shares at around 73 bucks and we collect a dollar in premium, that's gonna bring us to about $72 that's gonna be tied up per share.
That's $7,200 per contract. That's under our $10,000 limit. I'm gonna do that, okay? So buying a hundred shares, selling the one contract, it's the 21st of February, $77 and a half call. And I'm actually gonna do this. Let's see, we're trading between 72. 04, 72. 06. I'm gonna switch this to a market order to make sure that we get in, but just be aware when we're doing a trade, especially a combination trade like this, but when we're doing a trade and we submit a market order, it means we're just willing to pay the market price for the stock, whatever that takes. And we will accept the market price for the option, whatever that pays. The trader is taking a little bit of a risk here.
They might not be satisfied with one or two or both of those variables, but I'm gonna do that. Let's just go for a market trade, a market price trade. But I'm gonna come down here and make sure that I've selected first triggers sequential. And what we're gonna do, what we're gonna do with this is it allows us to add a second order. Our first order, that's the first, triggers our second order or sequential order. So if the first order fails, it triggers a sequential order. So I'm gonna right-click on our first order. Ambrose says, 'what if I own the stock?' Good question, Ambrose. In that case, all we'd have to do is go create a sell order for the option.
As long as we do it in the account that holds the stock, and as long as the long as we have a matching number of contracts for the number of shares, there's no need to like designate it as a covered call or anything like that. It just becomes a covered call, right? Chuck is going, 'wow, I would never do a market trade on a buy right.' That's a personal preference sort of thing, Chuck. But yeah, I can see that. But when it's a example trade, paper money, no real risk, clock is ticking, I have to get this done in 45 minutes and I can't sit around and wait to see if the trade fills, like I can if I'm not running a webcast. That's my motivation there, Chuck.
Not at all to say a trader can't have a preference and never use market orders on whatever kind of a trade. But once I've selected the advanced order, I can right click on my original order and create an opposite order. This is going to be our exit order if we need to get out, if the stock is falling. Okay, Benbrothersgoofy says, can I show an example, I think you're saying of selling just the call? Maybe, I'm not sure. Don't know if we're going to have enough time, but let's put in a stop order here. Okay, so the first thing, I'm going to leave this as a market order. Ooh, that's a preference thing. But let me explain that. I'm going to come over here to the far right and I'm going to add a condition to this order.
So we have an order to get into a covered call. We have an order to get out of a covered call under a specific condition. Here's the condition. I'm going to go to the gear icon, to the far right. And under the conditions, I'm going to choose under symbol C for Citigroup, method market price of Citigroup mark, less than or equal to, and we decided 67 bucks was going to be our stop level. Right? Well, so at $67, that means we want something specific to happen. I know that's a little bit squished. Just take my word for it. It says 67. I know what I typed in there, but this is the condition. This is what we want to have happen.
If the stock falls to or below $67, we want that to trigger a sell order to get us out of our entire covered call, the stock and the option, at whatever the market price is then. Here's where some traders may have a preference to go for the market price, because do we know exactly what the contracts are going to be worth if the stock falls below $67? We have no idea. Because if it happens tomorrow, that'd be different. It'd be different than if it happens two weeks from now. If it happens while volatility is up from when we place a trade, it's going to be different than if volatility is down from where we place a trade.
So in any case, what we're just saying here is: if the market price of Citigroup falls below $67, get out of this covered call at market price, and we're going to make that a good till canceled order so it doesn't expire on us at the end of today's trading session. Okay? So let me click save, and now we're ready to confirm and send this order. So we are going to buy the covered call market price. There's a reminder down here, due to potentially wide markets or liquidity risks at the time of activation, this order may be manually substituted with a limit order upon activation and work until filled. That is with our stop order. With market orders, yeah, that's again a reminder. Prices can change quickly in fast market conditions.
This is referring to our entry order. Be different from the quotes displayed at order entry. And with stop orders, there's no guarantee that the execution price will be equal to or near the activation price. So just because the stock, just because this order gets triggered at 67, it doesn't mean the stock sells for 67. It might sell for less than that. In any case, there is a commission to be paid on this, but let's send this off. There we go. And now we'll just see. We should get, I think, a relatively quick fill here with some market order here. There it is. Bought that, look at that, 72 . 02. I think we were looking at 72 . 02 to 72 . 04 net anyway. Guys, we've accomplished it. You know what?
I don't have really time to go through placing the individual trades, but really all you would do, all the trader would do is just click on the bid price in the same account for the call that they intend to sell and then customize it as they see fit for time, force, and order and all that sort of stuff. That sort of thing. Okay. Anyway, we'll talk about that in a future webcast, but we've gone through a quick review of the markets. We've talked through five steps for planning and placing a covered call trade. And we even placed that trade today. Hope you enjoy that. I'm looking forward to continuing this series. So I hope you'll, you're gonna have it in your personal calendar to join me.
We're gonna follow up on this trade in future webcasts. See how it plays out. Adding new positions, covered calls and short puts to the portfolio as we go. But I want you to go enjoy the rest of the series that are available through the rest of today. But as you do, remember that you have other resources available to you on YouTube. Make sure that you're subscribed to our Trader Talks channel on YouTube. So if you haven't subscribed already, you can just pop right down below the display window right now, click on subscribe. It doesn't cost anything. It only takes a second, but YouTube is the very best place to find our playlist of previous webcasts. You can join our live streams here. You can even do searches for topics of specific interest on our channel.
So great resource there, tons of videos that are already available. Also make sure that you're following Barb and me on X. You can follow Barb there at barbarmstrongcs. You can find me on X at cameronmaycs. It really is the very best place to connect. With your favorite presenters, love to see you there as a follower and that doesn't cost anything to do as well, so um always appreciate it. And I was, and I finally, I do appreciate everybody that's already clicked the thumbs up button. 168 people watching right now, 58 people have already clicked the like button. That's always appreciated; that sounds like applause to your presenter. It also gives the presenters' webcast a bit of a boost in the YouTube algorithm, so just make a habit of always clicking on that like button if you enjoyed a webcast. Alright everybody, thanks for giving your time today. Thank you Barb for helping out in the chat window. I will see you all in a future webcast; I'll see you on X, but whenever I see you again until that moment arrives, I want to wish the very best of luck, happy trading. Bye.
