The expected move
Option prices contain a forecast. From an expiry's implied volatility you can read the range the market expects the stock to stay in by that date, the expected move, and compare it with what you think will happen.
The calculation
The expected move is one standard deviation of the stock's price at the expiry, as the at-the-money implied volatility prices it:
expected move ≈ stock price × IV × √(days to expiry ÷ 365)
A stock at $200 with an IV of 40% and 30 days to expiry has an expected move of 200 × 0.40 × √(30 ÷ 365) ≈ $22.9: the options price a range of about $177 to $223.
What one standard deviation means
If prices moved the way the model assumes, the stock would end inside the range about two times in three, and outside it about one time in three. Real stocks have more large moves than the model allows, so take the odds as a guide, not a promise. Twice the expected move, two standard deviations, covers about 95% of outcomes in the model.
The straddle shortcut
Traders often read the expected move straight from the at-the-money straddle, the call and the put at the strike nearest the stock: its price is roughly what the options charge for a move either way. The straddle comes out at about 80% of the one-standard-deviation move, so the two numbers differ, but they rise and fall together.
Around earnings
An earnings report is where the expected move is most useful. The IV of the expiry just after the report includes the move priced for it, so comparing that expiry's expected move with the stock's past moves on earnings days says whether the market is pricing a bigger or smaller reaction than usual. After the report the IV falls back (the IV crush), and an option bought for the event can lose value even when the stock moves, if it moves less than was priced in.
Using it
- Strikes: sellers of premium often place short strikes near or beyond the expected move; buyers look for a move larger than it.
- Targets: a price target well inside the expected move is something the options already price as ordinary.
- Comparison: an expected move that is large against the stock's realized volatility says the options are rich.
In Options Meerkat
The detail page's contract table marks the expected move between the strike rows for the expiry shown, so you can see which strikes sit inside it, and the candlestick chart draws it as a band ahead of the price to each expiry. The P/L page prices a strategy from the same implied volatilities and gives its chance of profit, and the primer (K) works the expected move out on the symbol on screen.