How To Calculate Expected Move for Stocks

Whats up traders, today we are talking all about expected move. What it is, and how to calculate it. You do not need think or swim to find this number, just access to the options chain of the underlying asset you want to calculate the move for.

So what is the expected move?

Expected move is where we would expect with 68% accuracy where price will be contained for a given time period based on the implied volatility in the options chain. This would represent about a one standard deviation from the current price over the selected time frame and as we can see, one standard deviation on either side would give us 34 + 34 for a total of that 68%.

An important note before we start looking at how to calculate this number is that we want to make sure we take the read as the market is closed. For todays video we are looking at the weekly expected move, so we want to take this reading after the close on Friday but before the open on Monday.

Think or Swim Expected Move

So if you are using think or swim or tasty works, they have a proprietary algorithm that will display their estimated expected move on the right of the options expiration. We get a plus / minus some number. This will be the easiest way to gauge expected move… but don’t worry if you don’t have this. Ive got you covered with three very easy models to come up with a similar number.

1 – At The Money Straddle

First will be the pricing of the at the money straddle. All that means is looking at the last traded price, picking the nearest strike, and buying the call and the put both on the ask. Generally this number given current market context has been a bit below the ToS calculation.

2 – (At The Money Straddle + In The Money Strangle) / 2

To get a slightly more accurate price point, we can look at the pricing of the at the money straddle, add the first in the money strangle, and then divide by two to get an average, and as you can see, that number is exactly what ToS calculated.

3 – .16 Delta Options Strikes

The third method takes into consideration the skew in volatility from the call and put side of the chain, and that is to look at the 16 delta options on the call and put side of things. The reason that this works, if we look at the probability of touching and probability of ITM it aligns with how standard deviations work. Generally this method is more conservative and will price in a larger downside move compared to upside move.

Expected Move Takeaways

Overall expected move is not something that should be used as a to the penny calculation. We want to use this information to get a general sense for what the market is feeling like, and help provide context to any moves that do start to develop. Do you really want to be chasing it long as we get outside of the upper bound of the expected move? Might it be reasonable to look for opportunities to go counter trend? This is ultimately how we use the calculation to help better provide context to the environment we are trading in.