Expected Move or Expected Move

The Expected Move, (from now on EM), is the movement that the market expects to happen within a certain time with a probability of 68% (one standard deviation). The EM does not indicate the direction in which the market will move, but rather marks a range in which it can go up or down.
The EM is a mathematical model derived from the implied volatility of the option price.

To understand EM we must remember the following concepts:
Historical Volatility, is the annualized standard deviation of the movement of the stock.
Implied volatility is the implicit value that justifies the price of the options in the market.

Among other things, the implied volatility estimates the movement that the referred stock will have within a certain time.

Let's look at an example.

Suppose that the VIX (SP500 volatility index) is at 20. Which is the same as saying that the implied volatility of the SP500 is 20%.
This means that one year from now, the SP500 will move 20% up or down, with a 68% probability that it will end up in one of these values.
For ease of accounting, let's assume the SP500 is trading at $100. We should expect for next year a movement between $80 and $120 with a 68% probability of occurrence. This would be the EM of the SP500.

We agree that this information over such a long period is not very useful.
Next we see the equation to calculate the EM for any period of time.

EM = iv × share price √ (Days / 360)

Another easier way to see it is doing the straddle at the money (adding the ask of the CALL and the ask of the PUT ATM), this would give us the EM for the expiration date of the contract.

There are also several programs that already calculate the EM for all option expiration dates.

Taking this information into account is very useful when making decisions, both for the options and stocks trader.
for example we will know where to position the stop loss.
We could sell options above the EM.
Open butterflys at the ends of the EM or iron condors outside of it.

Rate this post
Share it:

Leave a Comment

Your email address will not be published. Required fields are marked *