[00:02] know that earnings is going to be, not to quote our current president, but it's going to be a nothing burger, right? Some of these trades can go as high as Some of these trades can go as high as 10. I I've done 25%, but let's set our
[00:15] expectations good and just, you know, look for the 5 to 10% gain on each trade. >> Most traders focus on what the stock will do after earnings. Edgy Brown trades what will happen to the option.
[00:29] Today he'll show us how he used calendar spreads to trade earnings. Welcome back, AG Brown. >> Hey, thank you for having me back, John. >> Let's get straight to it. Give us the 40 secondond version of why your way of
[00:43] trading earnings is so fantastic and why it has worked for you. >> Yeah, I'm always looking for the tradable pattern. And so what we have when we have an earnings or it could be any sort of event that's going to affect
[00:58] an individual company or a sector if we're going to look at an ETF. Uh the scoop is is that leading up into earnings or leading up to an event people don't know what to do but they know that they have to protect
[01:13] themselves. They have to do something. So they start buying some protective options and that raises the price of options. We call that an increase of implied volatility. And then right after the event, especially if that event
[01:29] turns out to be nothing special and the price of the stock winds up not changing, then those folks are going to quickly want to cash in those options, get the money out of those securities, and it causes a volatility crush. This
[01:45] is what calendar spreads do really well is make money when the volatility you today. >> All right. I look forward to get into bit about yourself. >> Yeah, sure. I mean, I'm AJ Brown and the
[02:01] name of the company I founded in 2003 is called the Trading Trainer and we've been just teaching folks how to trade option strategies all that time. We're
[02:13] coming up on about 25 years of being in the business of teaching people how to do that. And the thing I really like to tell people about is my nonprofit. So,
[02:25] in addition to having this online school where we teach people how to, you know, master options trading, we also teach inner city kids. We've got a partnership with a group in Chicago called the Chicago Board of Options Exchange. And
[02:39] we bring in kids every year. Uh last year we graduated close to 170 kids from our program uh from the south side of Chicago. So we like to get underserved
[02:51] uh youth in there so they can learn how to do the trading themselves. >> Let's uh start with the basic and I thought we will start with what what you already touched on what the typical market dynamics around earnings. Could
[03:05] you expand a little on that? Well, yeah, and I've actually got an infographic up on the screen that might be helpful if we wanted to share that. So, if you think about a lot of the traders that are in the markets, a lot of them are
[03:19] these big money traders. And I kind of look at them like oil tankers. Like, they can't take on and off their positions very quickly. It's kind of like how an oil tanker takes a very long time to even just turn around. Like, you
[03:33] can't say to an oil tanker, and this is very relevant. Based on what's been happening in the news for the last few months, you can't say to an oil tanker, "Hey, just turn around and go back." No, these things take forever to turn. They
[03:46] take forever to get from point A to point B. That's how we think about the big money traders. They're not going to all of a sudden just relinquish their whole position. That would disturb the whole market. Whereas a lot of the
[03:59] retail traders that I work with, and me personally, we're like the speedboats. like I can put positions on and put positions off very quickly. Um, and so the whole scoop is is these big money traders, what they do instead of
[04:14] liquidating their position when they're afraid of what might happen in the future, like when an earnings announcement is released and we're not sure how the rest of the investors might respond, is they're going to hedge their
[04:28] position with options. And so sure enough, when they hedge their positions with options, it causes the option prices to go up in price. It causes what we call in the option trading world an increase in implied volatility. And
[04:43] increase in implied volatility. And that's usually on those nearterm options more than it is on the farther out in time options. The options that these traders, these big money traders use to hedge their positions are usually the
[04:56] ones that are expiring in one, two, three weeks. actually. And so those are the ones that are going to have the biggest change in price because first biggest change in price because first there's a big buying of these. And then
[05:09] uh the the predictable pattern no matter what the stock price does is that right after earnings once there's a reckoning and we don't need that kind of insurance anymore. Those traders want to sell that insurance as quickly as possible so they
[05:24] can get their money back or most of their money back on what they spent before earning. So you'll see this very quick volatility crush and the price of quick volatility crush and the price of that near-term option drops. And so we
[05:38] try to capture that, you know, sell high. We try to figure out a way to sell high when the price is high right before earnings and then buy back low. It's kind of like shorting that near-term option.
[05:52] >> And to do this, you use the calendars. Explain for us just what is a calendar and how does it make or lose money? >> Yeah. So, a calendar spread, this is a little bit different than the vertical spreads that uh you know, a lot of
[06:07] option traders typically use. a calendar spread. Instead of having the same option expiration dates and different strike prices, the calendar or the horizontal spread actually has the same strike prices,
[06:23] different expiration dates. And so what we can do, right, I I mentioned that in order to take advantage of this volatility crush that happens after an volatility crush that happens after an event when uh the big traders are are
[06:37] relinquishing their hedge. First they hedge up and then as soon as the the news they they pass, we want to figure out a way to sell at a high price and then buy back at a low. But you can't just sell options. I mean, you can, but
[06:53] there's a lot of, you know, risk involved with selling options upfront. involved with selling options upfront. So, what we do is we create a calendar spread where we use an option that's maybe three or four months out that's
[07:06] more stable in price. remember the options that they're going to use to take advantage of this like hedging is going to be more like two to three weeks maybe four weeks uh are the options that are going to be the big ones that change
[07:20] in price because those are the ones they're using as hedges. So if we buy an they're using as hedges. So if we buy an option with the same strike price that's farther out in time, it tends to stay more stable in price than that near-term
[07:35] one. So, if we buy it and then that allows us that gives us the ability to then short the near-term option and then as soon as the event is over, we can go
[07:47] ahead and do the opposite, unwind that trade. We'll go ahead and buy back the now very inexpensive option and sell the basically the same price. That's kind of what I'm talking about here in my
[08:01] backmonth option. And I used a lighthouse to say, "Hey, this thing is, you know, stuck in the ground. It's there. It's it's steady. It's about, you know, it's a beacon. It's going to stay roughly at the same price." And then we
[08:17] sell the more volatile. And that's why I use the crashing wave front month option. And that allows us to profit from that change in extrinsic value.
[08:29] And with a calendar spread, the strikes are the same, but the expiration day is >> Absolutely different. And think about that, John. When the strikes are the same, there's, you know, the intrinsic value of an option. That's the value of
[08:44] value of an option. That's the value of the option at expiration. The intrinsic value of an option is strictly a a function of what is the current stock function of what is the current stock price and what is the strike price. So
[08:57] price and what is the strike price. So if you buy an option that has, you know, a strike price and has X amount of intrinsic value and then the rest of it is exttrinsic value. And then you sell one that has the exact same amount of
[09:13] intrinsic value and X amount of exttrinsic value. Those intrinsic values cancel out. So you're not actually trading any intrinsic value in these whether you're doing calls or puts. You know, people are saying, well, do I use
[09:28] a call calendar spread or do I use a put calendar spread? When it comes to the actual, you know, the the value of that actual, you know, the the value of that spread, it doesn't matter because you're
[09:41] spread, it doesn't matter because you're cancelelling out that intrinsic value by buying the same strike price as you're selling. The two intrinsic values cancel each other out and now you've just got the difference of exttrinsic value.
[09:55] >> So, this is basically a pure time and volatility play. >> Absolutely. Absolutely. >> So, could we set up an example trade of what you do? We will get into all the details of entry mechanics, exit
[10:09] mechanics, management, and so on. But let's just show one trade just so we is. >> So, this is one that I did on Goldman >> So, this is one that I did on Goldman Sachs this past earning season, and
[10:22] Sachs this past earning season, and their earnings was released um early on their earnings was released um early on that Monday morning, April 13th. So on that Monday morning, April 13th. So on April 10th, the Friday before, I went
[10:34] ahead and let's actually look at the calendar spread as a whole. I have it uh demonstrated here in both the calendar spread and as the separate leg so you can see what was happened basically the
[10:48] day before and I apologize that needs to show the day that I traded it out. I went ahead and bought this calendar spread. I bought 10 contracts. The price spread. I bought 10 contracts. The price per share for that calendar spread was
[11:02] $24.71. So that's the combination of the back month option that stays steady and then selling the overpriced front month option, right? And so the actual price is just that difference
[11:18] between those two option. And in this case it's 2471. And then after the earnings was released, and what I like to do is I like to wait for the stock to actually cross my strike price. And we can get
[11:32] into those details, but when I get when when I was at $95, that triggered the sell of the calendar spread. And so a couple days couple trading days after getting into the trade, I sold at 2617.
[11:47] I walked away with almost 6% profit, which may not seem like a lot, but I was only in the trade, you know, less than two trading days. So, for me, that's a great trade. And I just have to rinse and repeat, rinse and repeat.
[12:03] >> 6% in two days is a lot if you can repeat it. >> Yeah. Here I show the same exact trade, but you can see what the individual but you can see what the individual options did. So, I bought basically when
[12:17] I did the calendar spread, I bought the back month option for $51.85 and then immediately at the same time sold that front month option for $27.114. That was my calendar spread on April
[12:33] 10th, right before we closed for the weekend and opened Monday morning with Goldman Sachs reporting their earnings. volatility implied volatility was at its height that Friday going into the weekend. Then you can see what happened.
[12:48] There was a slight drop in the back month option, the one that now I'm going to be selling as part of the calendar spread, but there was an even bigger drop in that front month option. And that's what we kind of capitalize on is
[13:03] the drop. So we sold high, bought back low. We bought at a price and it stayed roughly stable. It lost a little bit of value but not nearly as much value as
[13:16] the front month option. And that's how the calendar spread works. >> So essentially the core data here is the difference in those two prices and how that difference uh develops. >> That's correct. Before we get into the
[13:29] details, AG, maybe we should also just show visualize a calendar spread just to make sure that everyone is clear about how this uh how this uh looks. >> Well, and I'm showing a current, this is option strat. We love this software. Um
[13:45] I'm showing what a current calendar spread looks like. Let me break it down a little bit better. I've got a teaching aid, John, that I use with my program participants. So this is what a lot of folks think of when they're thinking
[13:59] folks think of when they're thinking this is for an an example call option. So you can see here I've got the intrinsic value. This is the value of intrinsic value. This is the value of that call option at expiration.
[14:12] And then you can see what happens when we uh overlay the exttrinsic value. The we uh overlay the exttrinsic value. The exttrinsic value on this particular uh chart is this amount of value right between the intrinsic value and the
[14:28] actual final price of the option. What I just highlighted there is the exttrinsic value of the low volat volatility situation. If it was normal volatility, there'd be a little bit more extrinsic value. And of course in high volatility
[14:44] when people are kind of hyping up buying a lot of the stock increasing its price just because of the sheer demand for that particular option. You can see that the price gets much higher with exttrinsic value. But that intrinsic
[14:59] value doesn't change. And that intrinsic value is the same for in this case a $50 strike price call whether it expires tomorrow or whether it expires in two
[15:11] tomorrow or whether it expires in two years. So, when I now do a calendar years. So, when I now do a calendar spread where I buy one that expires spread where I buy one that expires pretty far out in time and then I sell
[15:23] pretty far out in time and then I sell one that's actually right in the same um one that's actually right in the same um strike price but closer in, you get uh a picture like this. And that's what we saw just now on the live option strat
[15:37] tool. you get basically the difference without the intrinsic value of just the without the intrinsic value of just the extrinsic values. So you've got a low volatility scenario, you've got a high volatility scenario, and you've got an
[15:52] even higher volatility scenario. So if you think about it, uh I'm using an option that is back month and I buy this option, right? And this is I'm showing kind of a relative price for that
[16:07] option. And then I sell the front month option which is and I have to turn off my magic marker which likes to disappear on me. Here we go. Let's try that one more time. The front month option is usually a more
[16:24] stable price. The I'm sorry. the back month option that expires 3 to four month option that expires 3 to four months out is a more stable price. When we buy this calendar spread, we're actually buying that back month option
[16:37] and then selling this front month option. And so the amount that we pay is option. And so the amount that we pay is this amount right here, right? That's calendar spread because you're buying and selling at the same time. Now, after
[16:54] the event, what winds up really happening is that backmon option usually changes just minimally because that's not the one folks are using to hedge with. And the farther you go out in time, the the less chance that they'll
[17:09] time, the the less chance that they'll be using that one to hedge. And then the be using that one to hedge. And then the front month option drops. It drops in price. So, when you go to sell this option, you're done. You're done selling
[17:22] that. you're you're going to sell that calendar spread, you wind up getting this amount of money, right? So that's where the profit that's how a calendar where the profit that's how a calendar spread profits on a volatility crush.
[17:35] >> And the difference the when you bought it, the difference that you marked in green here is also your max loss with with this trade, isn't that? So >> it is. I mean, you can set some stop losses or some bailout strategies based
[17:50] on that calendar spread price to, you know, put a risk stop in there. But for the most part, if you wanted to make sure that, you know, your position sizing for 100% loss, that's the position size right there.
[18:05] >> All right, I think it is time to get into your strategy and the actual entry into your strategy and the actual entry mechanics. So start with telling us how you picked your process of entering a trade. How do you pick your underlyings?
[18:19] What are the conditions that you want to uh be there etc etc. >> Okay. So you're going to want to find symbols. And so a lot of times what we
[18:31] do is we've been watching these symbols as experienced traders for a while. and we have symbols that we know when they go through earnings, there's usually very little uh change in price. Now, if you're not familiar, if you you're just
[18:47] new to trading and you haven't been watching symbols through earning seasons, you know, for the last, you know, however long you've been trading, then one of the things you can do when you're researching underlying symbols is
[19:00] look at the last eight earning seasons. So, it's about two years worth, two plus So, it's about two years worth, two plus years worth. And see if this is a particular stock that really doesn't move. What can really do you wrong here
[19:15] move. What can really do you wrong here is if your calendar spread is um you know, if you you have a a large movement in price, right? If there's going to be a large movement in price because of this event, this earnings event or
[19:28] whatever it might be, then you want to use a different strategy. You want to use like a straddle or strangle. This one is strictly for volatility crush. And so we want to minimize the amount of unexpected moving. So you could find
[19:42] symbols, you go back the last eight earnings and you want to see very minimal price action. In fact, what you want to see is that very quickly after earnings, the price is back in the same trading range that it was before
[19:57] earnings. Usually our front month option is about one to two weeks out. So, you really want within five to 10 trading days, you want that price back where you would expect it to be. The other thing to look at are symbols. You know, if
[20:12] you're going into the July earning season, like we're about to, um, you want to look back at July and 2025, July and 2024, you know, and see if that
[20:24] seasonality of that particular earning season is one that creates unexpected price action. The other thing you can do is if you've got some sort of bias like
[20:36] you've been watching a symbol for years if not decades and you have developed a certain bias about which direction it might go after earnings because what you
[20:48] want to do when you're selecting the strike price John of the calendar spread is you really want to exit when the stock hits that strike price. So if you
[21:00] have a bias to the bullish side on Goldman Sachs for instance and they Goldman Sachs for instance and they release their earnings and you pick a strike price that's one or two higher than where you were, you know, you're
[21:13] going to look to exit in the next five, maybe 10 trading days, depending on where your front month option expires. You're going to look to exit when the stock crosses those strike prices. So if you have a bullish bias, you might pick
[21:28] you have a bullish bias, you might pick the strike prices a bit higher and allow the stock to to cross that number and that's your your exit signal. We often program our exit signals into our automatic trading platform. Same with
[21:41] the lower side. But a lot of times what we're looking to do, John, is just find one where right the day before earnings, we trade a strike price right around at
[21:54] the money. And that's what we're hoping to exit at in the subsequent days. >> There are a number of tools that you know can help you find the historic information about around earnings for different stocks. I just want to mention
[22:08] the profits. We we cooperate with one of them called earnings watcher that has all this information and you can find find these uh ways and we do have we do uh help you to get the 33% uh discount for the annual rate if you book through
[22:23] screen. >> Tools like that John are absolutely invaluable. Sorry I didn't mean to interrupt but those tools are invaluable for this type of strategy. >> Yes. because it's hard to kind of find
[22:37] all that information on your own although it is of course uh available. So you um you have told us how you choose your underlyings. Let's now go that you know how do you pick your strike and be and let's you have
[22:53] mentioned it but let's also do the exact uh expiry dates that you choose. >> Yes, absolutely. So let's take this Goldman Sachs. I'm going to focus on that one because that's the trade we just demonstrated. So, I'm going to kind
[23:06] of highlight the price action that was happening uh right before earnings. So, happening uh right before earnings. So, here's that Friday, April 10. And so, you know, I have I I've been trading earnings on Goldman Sachs every quarter,
[23:20] unless there's something happening with finance or banking at the moment. That's the only time I might pass on Goldman Sachs. But Goldman Sachs tends to be very consistent. Maybe there's a little bit of a pop, but soon Goldman Sachs
[23:35] returns back to normal. Again, pay attention to what's happening in the headlines. Pay attention to the sector headlines. Um, but on this past April, uh, right at the end of the day, uh, it was around 3:00 New York City time, so
[23:51] an hour before the markets closed, that's when I went ahead and picked my earning strategy. And you saw that, you know, we were we wound up using the $95
[24:03] strike. Goldman Sachs was trading about every $5. And so um I that was the at every $5. And so um I that was the at the money strike. Now come uh Monday morning, you know, Goldman Sachs had their call, prices gapped down, there
[24:20] was a little bit of price action. my sell order and my sell order is good till cancelled is as soon as the underlying crosses the strike prices of my calendar spread send an order down and liquidate that calendar spread. So
[24:38] that order didn't go on Monday after the earnings was announced but sure enough on Tuesday that's when we crossed that price that strike price and I went ahead price that strike price and I went ahead and liquidated. Now if you do have a
[24:51] bias like say for instance I would have said maybe I want to go 900 or 8.95 that bias will buy you a little bit extra profits but man biases are really
[25:05] hard with earnings that now we're getting into the unpredictable pattern. The predictable pattern is that volatility crush. So be careful with your biases. Make sure you have some sort of, you know, relationship with
[25:20] that particular symbol if you're going to play the bias game. >> But do you always put this trade on just before the end of closing the day >> Ah, I usually come in. So I I'm an end of day trader. Uh, that means I look at
[25:35] of day trader. Uh, that means I look at my signals at the end of the day and then I go ahead and do any sort of trading the next day. And on the next day, I wait for the morning session to be done. I come in in the afternoon or
[25:48] even at the end of the day. Uh we call that afternoon session or professional hour session. Uh I come in then when you know the big guys are kind of reckoning their portfolios or all that news headlines that are in the morning
[26:03] session. Any economic news, it's already passed and hopefully digested by then. I do all my trading in the afternoon. And then for the earnings plays, yeah, I come in usually like two hours before the market close, take, you know, take
[26:18] inventory of the symbols I want to do this on, see where they're at, and then pick the strike price accordingly. >> But on the day before the earnings is are announced, >> so it's it's the the let's say it's the
[26:34] session before. So, it pay attention when you're using your earnings uh analysis tool. Pay attention to whether this company does their earnings and their conference call before market open or after market closed. Because if it's
[26:50] before market open, the way that Goldman Sachs was, this was before market open on Monday, I want to make sure my trades in place before that earnings is
[27:02] announced. So, that would put me on Friday. Now, if it was after market close, then I want to do it the day of because you want to be in the session before the earnings announcement. >> You said that you prefer to find stocks
[27:17] where there have been historically not so much big movements after the earnings, but those would also have lower implied volatility typically, I guess, than those with bigger moves. Uh, so that would kind of balance out on the
[27:31] other end. Why? Why do you choose like that? >> Well, again, like I mentioned, if you do have some sort of bias, you have an idea of what earnings is going to do, you know, you could really capitalize on
[27:47] both having that, you know, calendar spread with the strike prices in the direction you expect it to go. And if it does that, you know, you could really capitalize. What I'm trying to do is is I understand that there'll be less, you
[28:02] know, fear around a Goldman Sach sack stock, but there's always a little bit. Remember, implied volatility isn't actually a response to what is happening. It's a it's a fear response to what might happen. So yeah, the the
[28:20] investors that are going to hedge against a surprise with the earnings on Goldman Sachs are going to be fewer than say something that is known to pop. But this calendar spread, let's go back and quickly look at option strat because I
[28:36] want to make sure people understand if I go ahead go ahead and uh you know I I sell or or I buy my and uh you know I I sell or or I buy my calendar spread and then I exit after
[28:50] the volatility crush which means the calendar spread does something like this. That's great, right? I make that five or six percent, maybe I might be lucky to make a couple double-digit uh returns. If I've got a bias, for
[29:06] instance, and I buy the calendar spread when it's here, and not only do I get the volatility crush, but it goes in the direction I want it to, and I exit when the underlying is at that strikes, now I'm going to make even
[29:22] more because I've included my bias in there. However, if I have I if I'm trading it and I don't have a bias involved and indeed it does gap, look at
[29:35] what happens. So, the calendar spread is not the right strategy to use if there's really a large amount of underlying symbol price action. Um, again, that's a
[29:48] whole different type of uh that's more of like a breakout on earnings trading. strangle, but these are the ones that we use when we know that earnings is going to be uh not to quote our current
[30:01] nothing burger. >> Let me interrupt with a quick tip. If you like trading earnings, earnings trades are some of the most exciting opportunities in the market, but they can also be tricky to do right. Big
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[31:05] interview. So, let's talk about your exit mechanics. You have already told us that you set an order to close the trade when you set an order to close the trade when uh the price hits the strike.
[31:19] >> Automatic order that can happen the first day, it can happen the second day, the third day. What is the typical results you will get them? >> So, it depends on the particular underlying symbol. Usually, you're going
[31:33] to get, you know, in just a couple of days, uh, it's usually going to be anywhere from 5 to 10%. Some of these trades can go as high as 10. I I've done 25%, but let's set our expectations. is good and just, you know, look for the
[31:49] good and just, you know, look for the five to 10% gain on each trade. >> But I guess not all trades go as expected. So what we always want to have when you get out, >> right? So this is where choosing the
[32:06] call and the put, whether it's a call calendar spread or a put calendar spread is is important, right? because we can actually leg out of it if we have to.
[32:18] So, I like to put my good till cancelceled order in place, but if I get to the point where that front month option is going to expire, that's going to leave me, you know, in a in a bad situation. So, I would rather close that
[32:34] front month option and be left in the back month option. And so this is where if you close your front month option, you don't have that cancelling of the intrinsic value anymore. You want to make sure that the back month option is
[32:48] make sure that the back month option is in the direction of your underlying symbol. So when you're choosing whether to do a call calendar spread or a put calendar spread, you might want to put some thought into again, you know, this
[33:02] bias. This is where, you know, doing your research on the underlying symbol. And even though we're aiming for a volatility crushonly play, have some sort of confidence in one direction or another and choose the call spread or
[33:17] another and choose the call spread or the put spread so that if the worst case scenario happens and you have to liquidate the front month option and stay in the back month option that at least the backmonth option is going to
[33:29] profit in the correct direction. And that's what we wind up doing. We wind up holding our good till cancelled order for maybe five, maybe a few extra days depending on where that front month option expiration date is. And if it
[33:44] hasn't filled by then, then we start to come into our backup plan of maybe we have to leg out of this. Maybe we have to see how we're going to adjust this position so it can trade in the long term.
[33:57] it for a loss with the closing both legs? I hate admitting a loss. So, I look to adjust. I mean, that's the beauty of options is that you could actually adjust just about any trade to morph it from, say, a volatility crush
[34:14] trade now into a directional play. So, I'll do everything I can to try to save this trade, remembering that it's easier to save a trade when it's not under
[34:27] stress than to try to save a trade uh that is under stress. So, if I picked my bias wrong, if I picked the wrong calendar spread, yeah, I'm just going to have to take the knocks on the head. Uh the beautiful part about extrinsic
[34:43] value, one more one more kind of plug on canceling out the intrinsic value. You'll notice that extrinsic value is parabolic and that means that you know
[34:55] the farther you get away from at the money the less that it loses each time. So you know you're never going to in a calendar spread go all the way to zero.
[35:08] Let me go ahead and show you on the option strat screen kind of why I love trading extrinsic value. In other words, having a strategy like the calendar,
[35:20] like the horizontal spread that cancels out the intrinsic value. And that is out the intrinsic value. And that is that the price action is parabolic. So what does that mean? Well, that means that as soon as we are, you know, moving
[35:35] with the underlying symbol from at the money, the losses all come in at first and then they taper off. So, say for instance, you know, with a certain movie
[35:48] movement of the underlying symbol in either direction away from the at the either direction away from the at the money, uh say we lose uh 5% of the trade, right? in either direction. The next 5% is going to take much more
[36:06] movement of the underlying symbol to the point where if we set our stop loss for the trade, you were talking about the amount at risk is that difference between the two options. The beautiful part is is that risk takes longer and
[36:22] longer to add on. So, if we actually put a stop loss or a conditional trade on the price of the calendar spread, we can actually set that at 20% 25% and
[36:35] liquidate that and be able to calculate max loss, but also that's not going to kick in linearly. It's going to take a lot of time for us, you know, a lot of underlying symbol price action for you to get to that max loss. And in the
[36:50] meantime, you could come up with alternative adjustment plans as the stock price, you know, stabilizes after the earnings event. So there there's a the earnings event. So there there's a lot of forgiveness in this strategy.
[37:05] >> So you have told us that you hate admitting a loss. So you will try to manage and see if you can make some adjustments and uh and get get out of it
[37:17] in a in a positive way even if it moves against you. So can you explain for us a few of those ways you are doing an adjustment what you can do what are your options here to speak so to speak. >> Yeah. Yeah. So the biggest one is buying
[37:33] to close that front month option. So, it's basically admitting a loss but only on half of the trade. Remember, the backmonth option isn't going to be expiring for three or four months, right? So you've got time for the
[37:49] underlying symbol to change directions, you know, and if you picked whether it's a call calendar spread or a put calendar spread, if you picked it well and all of a sudden the symbol is going up, if I go ahead and take my losses, cut my losses
[38:04] on that front month option, I'm now left with a long put or a long call that's going to profit depending on which way the symbol is going. And you know the likelihood in the next 3 to four months, especially if you've got your technical
[38:19] signals and you can build a confidence bias, you know, you holding on to that back month, it may recuperate. And so that's kind of the way that we would adjust a calendar spread, >> but it may also go keep going in the
[38:33] wrong direction on that long you have left. And then you have kind of make made your losses bigger. >> It's true. But again, once you're out of the money, that extrinsic value is going to then decay parabolically.
[38:49] to then decay parabolically. So you've really got a lot of extra space that if it were linear, if it was just intrinsic value. So your intrinsic value may have wasted away as soon as this option became out of the money,
[39:02] you've still got a lot of forgiveness. So again, so you set your stop-loss So again, so you set your stop-loss order and even though that full amount is at risk, if you set like for instance a 25% stop-loss order, that gives you a
[39:15] a 25% stop-loss order, that gives you a lot of freedom to let the stock do what it wants to do, possibly reverse without actually having to admit the loss until it gets to that worst case scenario. And of course, you want to size your
[39:29] position accordingly, you know, to uh deal with the worst case scenario. So, if you're going to, you know, put a stop-loss order on 25% of the uh
[39:41] calendar spread price, have a exit order conditional on losing 25% of the calendar spread. And say you only want to lose, you know, you only want to risk
[39:53] 2% of your portfolio. Well, then you're going to keep this position size to less than about 10% of your portfolio. That way, you'll be able to if you, god way, you'll be able to if you, god forbid, hit that 25% stop loss, that's
[40:07] only going to affect your portfolio by, you know, two two and a half%. >> Are there other ways you typically will manage or adjust these uh trades? >> That's really the big one, John. And the main thing is is I I have to say out of
[40:22] all the trades that we do, my program participants and I on these type of earnings because of the research we put in on the front half, I would say one in five trades, about 20% of them don't work out the way we want them to and
[40:37] that we have to figure out what to do after the fact, whereas the other four trades do exactly what we want them to. And so, you know, admitting a loss on And so, you know, admitting a loss on 20% of the trades is actually going to
[40:52] be okay with this strategy. >> Let's talk about risk. What's the worst that can happen with this strategy? >> Again, that is what we were just talking about. That's where if you set a 25% stop loss on the calendar spread, then
[41:09] that's exactly what you're the the worst case scenario you're going to admit on this one trade. So again, size your positions accordingly. Make sure that you know we have an a a a very simple mathematical equation and that is the
[41:24] position size equals the risk of the portfolio divided by the risk of the trade. So if you want the risk of your portfolio to be only two 3% put that in the numerator in the denominator of that division problem put your worst case
[41:40] scenario risk. In this case if you set the stop loss at 25% it's going to be 25%. You could put an error factor in there. You could put 30 35% if you don't think you'll get caught at the price that you get stopped out at. and
[41:54] calculate how much of your portfolio you should put into this trade and never go >> And I think if there is one message that is repeated in interview after interview
[42:06] on this uh channel by all almost all guest it is exactly this risk management and size your position safely. Number one, that's how you can tell the
[42:18] difference between a successful trader and an unsuccessful trader is how they >> You talked to many students about this. What is the typical most common error
[42:30] you see people doing risk-wise with calendars? >> Overextending doing bigger positions. And the reason is is because when you take the difference between those two uh vertic those two those two options when
[42:46] you take the the the price of it the price can be quite affordable. And so price can be quite affordable. And so people think oh this is only you know people think oh this is only you know $5. This is only $6. A contract is only
[42:59] $5. This is only $6. A contract is only $500 $600 and my portfolio is $10,000. So I should be able to do you know five, six, seven, eight con uh contracts. You know people size their position instead of analyzing what the worst case
[43:15] scenario is. We call that the max risk for the trade. Instead of analyzing that, they kind of base their position sizing on their personal confidence. So, if they've done a few of these earnings trades and the earnings trades have been
[43:29] going well for them, all of a sudden you start to see their position size growing, not because they're using, you know, risk management and using, you position size, but they're they're using, oh, I've been I've been doing so
[43:45] well. Let's keep growing the size of our investment, our our our our bet, if you will. But that's not a good long-term play at all, is it? AJ, I would like to play at all, is it? AJ, I would like to ask you to put your strategy and your
[43:59] way of training on a risk profile scale where one is very low risk and 10 is a very high risk. And >> in my interviews, you can define those put it and why? >> I would say a volatility crush play. And
[44:15] this is again depending on, you know, whether or not you have a rapport with this symbol, right? I would say it's probably on the risk of six or seven. probably on the risk of six or seven. >> Um, but when you have that rapport with
[44:29] the symbols and you've been watching them for a while or you've done your due diligence and checked with them, you've paid attention to, you know, what folks are leading up into the event. And again, it it's not always earnings. One
[44:44] of the biggest events that I do this strategy on that has nothing to do with earnings is the CES, the Consumer Electronics Show. You'll see a lot of the tech companies all of a sudden have a lot of implied volatility leading up
[44:57] to the CES show. Uh, and then all of a sudden, right after that CES show, the implied volatility crushes. So, it's any event, but earnings is the most common.
[45:09] And I would say that if you've got that rapport with the individual symbols and you you you have assigned in your head what the avatar is of those investors that are interested in those symbols, you've got it figured out. Uh you know
[45:24] that that number drops from a six or seven down to a three or a four in my >> What have been your results trading this strategy over time and how do you measure it?
[45:36] >> So I'll be completely honest. So the first earning season this year in 2026, the January earning season, I actually opted out, right? Because there was so much happening. There was uh tariff
[45:51] discussion there. There was already kind of a buildup happening in the Middle East of the US military. There had already been, you know, some stuff happening in Venezuela. The markets were very uncertain. And I was like, you know
[46:06] what? uh these earnings announcements are not going to play out. But when it comes to the more predictable earning seasons, April was so so I'm expecting
[46:20] this earning season coming up in July 2026 to be a little bit more predictable. I'm already seeing predictable patterns starting to show up in the charts now. you know, I could easily uh pull out 10 to 25%
[46:36] easily uh pull out 10 to 25% uh maybe as low as 5% from these trades individually, which you know in a given earning season could grow my portfolio easily by 20 25%. >> But like in 2025, what were your results
[46:52] trading, it's so much this year, >> right? That that those were the numbers I was giving you. So uh you know anywhere from a particular earning anywhere from a particular earning season would grow my portfolio 10 12%
[47:05] season would grow my portfolio 10 12% and I would say last summer uh this was after the April you know I'm going to put tariffs on every country in the world that was already digested and we were kind of rolling back up and
[47:19] summertime you know we've got this uh activity where a lot of traders we call it the summer doldrums and this is a time where a lot of the earnings plays do exactly what we want them to do for the options uh for the calendar spread.
[47:34] Um you know I walked away with close to 24% increase in my portfolio after just those three weeks. >> And how much of your portfolio are you season? >> Oh, I would say I always have a little
[47:49] bit of my portfolio. If there's a VIX trade uh VIX hedging trade available, I've got money in the VIX hedging trade. I like to do a lot of premium selling. So, I've got some premium selling. I would say that I had about 50 to 60% of
[48:03] my portfolio involved in these earnings while the other 40% were doing other things a little bit more passive. >> Let's sum up. How will you sum up what we have been through and especially what would be your two or three most
[48:17] important takeaways that you really want the audience to remember? >> Okay. So number one, I think finding symbols that are going that that historically uh investors are anxious about before
[48:33] uh investors are anxious about before earnings but wind up not displeasing or not, you know, not giving unexpected results. In other words, pay attention to the stock price before and after earnings. Make sure it doesn't change
[48:45] unpredictably. and also pay attention to what's happening in the world and what's happening in the world for this particular company. That's number one. So stock selection, underlying symbol selection and number two, just being
[48:59] very patient when you come in the the session before the earnings announcement. Pay attention to what price is doing. Set your calendar spread. You know, back month is three to four months out. Front month is two to
[49:14] four weeks out. at the most four weeks, maybe three weeks and set your calendar spread and then be patient on after the session uh after the earnings announcement. Use your good till cancelceled order and allow that stock
[49:30] strike price to get crossed by the stock price and allow the automatic trading to happen. I love setting my automatic traders, you know, conditional orders. Let that happen. Don't babysit these until you have to. What would be good
[49:45] resources to learn more about calendar trading in particular and uh calendars around earnings? >> I mean the the best thing that you could do is use Option Strat, which by the way I have to thank you. You're the one who
[50:01] turned me on to Option Strat and uh I know that uh neither one of us really um besides perhaps being an affiliate for Option Strat, we're not affiliated with the company at all. We just found this tool and it's just a phenomenal tool. So
[50:17] run through scenarios, go historically and run through the different scenarios and see it visually for yourself. You know, whether you're somebody who likes to look at pictures or whether you're somebody like me who likes to look at
[50:31] the actual trades and the individual trades to see what the different options do, you know, the more exposure you can do. And a lot of people like to talk down, you know, going back and back testing and paper trading. You know, for
[50:45] them that doesn't make sense unless they put their real money into it. But I'm telling you, paper trading is just as good as real money trading because it gives you that realworld experience. So spend an earnings season e season
[51:01] actually just paper trading a bunch of these and then doing post-mortems. What did I do right? What did I do wrong? What happened unexpectedly? Could I have seen that? Just go through the motions. You know, you're not going to learn by
[51:16] watching this video. You're not going to be learn by reading a bunch of books. You're not going to be learning calendar spreads by, you know, signing up for a bunch of different courses. What you're going to learn is actually by doing and
[51:31] play it safe. Do it with paper trading. Are there any good books you would like to recommend about options trading? >> I mean, my favorite uh I like the um I'm
[51:45] looking back at my bookcase right now. The options trading book that I like the most. Well, of course, there's option volatility and pricing. That's the the volatility and pricing. That's the the bible of options. Um there's also one
[51:59] that I h I I I have on my bookcase here that's actually called the bible of options trading. Um and then you know just knowing about different patterns uh and paying attention to patterns because that's what option trading is isn't it?
[52:14] It's pattern recognition. Recognizing patterns, not just p patterns in price and volume, but patterns in implied volatility changes, right? Patterns in time decay, paying attention to the patterns and finding out which is the
[52:30] patterns and finding out which is the predictable pattern given the the setup, right? So once you've got the pattern figured out, it's really easy to pick one of the different option strategies to profit from the pattern. The whole
[52:44] trick is recognizing the pattern and getting the pattern right and then it. >> And I would like to as always uh recommend you to also check some of the other interviews we have on this
[52:58] channel. We have a few interviews about calendar spreads, other ways of trading them. We have a few interviews about earnings trades and we do have the first interview with AJ Brown about his VIX hatch trade that he mentioned in the
[53:14] interview. >> AG, thank you very much for coming back to the profits and sharing how you trade earnings. >> Absolutely. Thanks for having me back, John. I love it.