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Market Measures

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Expected Movements

Market Measures

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How much buffer room can we expect from the movements of the stock over a 45 day period compared to our breakevens on a strangle? In other words, on average, how much wider are our breakevens than the actual movement of the stock?

Study
  • SPY, 45 DTE
  • 16 delta puts and calls (strangles)
  • Held the strangles to expiration
  • Compared:
    • Average upside and downside breakeven range as % of underlying price (expected moves)
    • Average actual up and down move as % of underlying price

We find that the breakevens overstate actual movement by a significant margin. This is the same argument as the implied moves overstate realized (actual) movements.

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