Expected move explained: what the options market is telling you

Every option chain contains a forecast that nobody wrote: the width of the price range the market is willing to pay for. That width is the expected move. It is the single most useful number a non-professional can pull out of an option chain, and it is also the most commonly misquoted, because three different definitions circulate under the same name.

What it is

The expected move is the one-standard-deviation range of the stock price at a given expiry, as implied by at-the-money option prices. If a stock trades at 100 and its expected move to Friday is 3%, the market is pricing roughly a two-in-three chance that Friday's close lands between 97 and 103, and a one-in-three chance it lands outside.

Three things follow from that definition that people routinely get wrong:

• It is a range, not a direction. The chain says how far, not which way.
• It is a probability statement, not a boundary. One in three expiries closes outside the range. That is not the model failing; that is the model.
• It is priced, not predicted. It reflects what buyers and sellers of options agreed on, which is a much better forecast than any individual's guess but still just a consensus.

Where the number comes from

There are two equivalent ways to get it, and a good calculator uses both depending on the expiry.

From implied volatility: take the at-the-money IV, which is quoted as an annual figure, and scale it to the expiry with the square root of time.

A stock with 32% IV and 30 days to expiry has an expected move of 32% × √(30/365) = 32% × 0.287 = 9.2%. Not 32%. The annual number is the one people remember, and it is the wrong one to use for anything shorter than a year.

From the straddle: the at-the-money call plus the at-the-money put costs, in theory, about 0.8 standard deviations. Divide the straddle price by 0.7979 (the square root of 2 over pi) and you have one standard deviation.

For anything under about a week to expiry the straddle route is more reliable, because quoted IV for very short-dated options is noisy while the straddle price is a real bid and offer. OptionsMovement switches methods at 8 days; the methodology page has the details.

The "straddle times 0.85" problem

A widely repeated shortcut says the expected move is 85% of the straddle price. That number is not wrong; it is a different quantity. It approximates the mean absolute move, which is about 0.68 standard deviations. A calculator that uses 0.85 for weekly expiries and the IV formula for monthly expiries is quoting two different things in the same column: one row says "68% of closes land inside", the next says "about 50% do". If you ever see a table where the expected move roughly doubles between the 6-day and 8-day row on the same stock, that is what happened.

How to use it

Setting targets and stops

A price target beyond the expected move needs a reason the market does not have. A stop inside a quarter of the expected move will be hit by noise. The range tells you what "normal" looks like for that stock over that horizon, which is what stops and targets should be calibrated against.

Choosing strikes

Selling a strangle with both strikes at the edge of the expected move collects premium for taking a roughly one-in-three risk of being tested. Buying a call one expected move out of the money is a bet on something that happens about one time in six. Neither is right or wrong, but the numbers should be known before the order goes in.

Comparing expiries

Because the range grows with the square root of time, doubling the time to expiry adds only about 41% to the range. That is why very short-dated options look cheap per day and are not: the daily range does not shrink as fast as the days do.

Events

Around earnings the chain prices a jump on top of the usual daily wobble. The expiry just after the report will show a much wider range than the one just before it. The gap between them is the earnings move; the earnings guide shows how to extract it.

What it does not tell you

The expected move assumes moves are roughly bell-shaped. Real stock moves have fat tails: the four-standard-deviation day that "should" happen once a century happens every few years. Wide bid/ask spreads on illiquid names make every figure fuzzier. And the number is a snapshot: it changes with every tick in option prices, so a range read at the open is stale by lunch on a volatile day.

Used as intended, as a ruler for what the market considers normal, the expected move is the fastest way to turn an option chain into something a decision can be based on.