# Expected Move: Sanity-Checking Trade Ideas

Mar 21, 2019

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.”

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.