Expected Move: Sanity-Checking Trade Ideas
Expected Move: Sanity-Checking Trade Ideas
While it sometimes gets lost in the volatility shuffle, Expected Move is a valuable metric that options traders can use to sanity-check potential positions - or even to reevaluate existing positions.
Fortunately, the math behind the expected move calculation isn't that complicated. The inputs needed when calculating this important metric are:
stock price (SP)
current implied volatility (IV)
days until expiration (DTE)
Once a trader has identified the above numbers, they can be plugged into the following equation: (Stock Price) x (IV/100) x [square root (DTE/365)] = Expected Move.
Before we jump into a potential interpretation of the expected move metric, let's take a look at a simple example. For instance, imagine that SPY is trading $279, and implied volatility in SPY is 15, while the days-to-expiration for the option(s) is 45.
Plugging those values into the expected move calculation, we get: (279) x (15/100) x [square root (45/365)] = +/-14.69
Now that we have a value for expected move, we can apply this number to a hypothetical trading scenario.
Let’s say a trader was considering a short straddle in SPY, with 45 DTE, and the underlying trading about $279. The trader might feel different degrees of confidence if he/she could sell the straddle for $8 as compared to selling it for $16.
Referring back to expected move, the options market is implying there's a 68% chance that SPY closes between 264.31 and 293.69 (that’s 279 +/- 14.69). This range encompasses a one standard deviation move. To capture 95% probability (that SPY closes within the range over that period), one would simply widen it by another 14.69 on both sides. And for 99% probability, the range would be widened once again by 14.69.
Regardless, most option traders are comfortable being right 68% of the time, which is why a one standard deviation move plays such an important role in decision making.
Applying 14.69 to the potential straddle sales prices of $8 and $16, one can see how expected move can serve as a very valuable resource when evaluating potential trades. In this case, a trader probably would not consider selling the straddle for $8, but might strongly consider a sale at $16.
The nice thing about expected move is that it moves the discussion past implied volatility, which may seem slightly convoluted at times, and frames the risk-reward proposition into terms that can be easily analyzed.
Traders seeking to learn more about expected move may want to tune into a new episode of Options Jive which focuses on this precise subject. On the show, the hosts walk viewers through not only a comprehensive review of expected move, but they also show how expected move changes when implied volatility gets “shocked.”
If you have any questions about expected move, don’t hesitate to leave a message in the space below, or email us directly at support@tastylive.com.
We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.