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How to calculate and use expected move

Options Expected Move Calculation

How to find the expected move in options

The expected move in options refers to the amount that the market expects a stock to move over a certain period of time, as implied by the price of the options on that stock. Here are some steps to find the expected move in options:

  1. Look at the options chain: An options chain lists all of the available options for a particular stock, including their strike price, expiration date, and premium (the price you pay to buy or sell the option).
  2. Find the at-the-money (ATM) options: The ATM options are the ones whose strike price is closest to the current market price of the stock.
  3. Calculate the straddle price: A straddle is a trading strategy that involves buying both a call option and a put option at the same strike price and expiration date. The straddle price is the cost of buying both the call and put options.
  4. Calculate the implied volatility: Implied volatility is a measure of how much the market expects the stock to move, based on the price of the options. You can calculate implied volatility using an options pricing model, such as the Black-Scholes model.
  5. Calculate the expected move: Once you have the straddle price and the implied volatility, you can calculate the expected move by multiplying the straddle price by the implied volatility.

For example, let’s say you are looking at options for a stock that is currently trading at $100 per share. The ATM call option with a strike price of $100 and an expiration date of one month from now has a premium of $5, while the ATM put option with the same strike price and expiration date has a premium of $4. The straddle price is therefore $9. If the implied volatility is 20%, the expected move would be $9 x 0.20 = $1.80. This means that the market expects the stock to move up or down by about $1.80 over the next month.

Selling options outside the expected move can be a high-risk strategy as it involves selling options with strike prices beyond the expected price range of the underlying asset. This strategy is also known as “selling naked options” because it involves selling options without owning the underlying asset.


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