Glossary · Options
Expected Move: What an Option Price Implies About a Stock
Option prices carry a forecast of how far a stock might travel by expiration. The expected move turns that forecast into a dollar range you can put on a chart.
Definition
Expected move The size of the price move, up or down, that current option prices imply for a stock by a given expiration, usually stated as one standard deviation.
Also called Implied move, One standard deviation move.
People read the number as a prediction. A stock with an expected move of $11 is going to move $11, the thinking goes, and it will probably go in the direction the trader already had in mind. Neither half of that holds. The expected move measures size. It comes from option prices and says nothing about which way.
The formula
Three inputs go in, namely the stock price, the implied volatility of that stock’s options and the number of calendar days until the expiration you care about, and they combine in a single line of arithmetic.
Implied volatility is quoted as an annual figure. The square root term scales it down to the period you are looking at, which is why a 30-day move is much smaller than a full-year one.
In words, the option market is pricing this stock to finish somewhere within about $11.47 of $100, one way or the other, over the next month, and anything outside that band is the less likely outcome. The expected move calculator runs the same sum for any price, volatility and date.
What “one standard deviation” means
The result is one standard deviation of the distribution that option prices imply. If returns followed a normal distribution, roughly 68% of outcomes would land inside the range and the rest would fall outside it, split between the two sides.
That is a probability statement about many possible outcomes. On any single expiration, the stock lands where it lands. About one time in three, under the normal assumption, it finishes outside the band, which is often enough that a range this wide should never be treated as a wall.
The straddle shortcut
Around earnings, traders often skip the formula. They add the call and the put at the strike nearest the stock price, in the first expiration after the report, and treat that at-the-money straddle price as a quick read of roughly the same thing, which is how much movement the market is paying for.
The two numbers will not match exactly, because they are calculated differently. Either works as a quick check. Is the report priced for a big reaction or a small one? Options have priced the earnings move argues for respecting that number before you trade the event, and reading an earnings calendar tells you which expiration is the first one after the report.
Where you see it
Many option chains print an expected move beside each expiration. Some show dollars, some a percentage. Some charting tools draw it as a pair of lines above and below the price, and however it is displayed the figure keeps changing through the session, because the stock price and implied volatility that feed it keep changing too.
No figure on your screen? Work it out from the chain. You need at-the-money implied volatility, the stock price and a calendar.
What it does not tell you
Direction, for a start. A $100 stock with an expected move of about $11.47 is priced as likely to reach $111 as $89, give or take any skew in the chain. If you have a view on direction, that view comes from somewhere else.
It also understates the extremes. Real stock returns have fatter tails than the normal curve. Large moves outside the range happen more often than the curve implies. Earnings gaps, takeover news and sharp selloffs across the whole market all produce days the model treats as very unlikely, and anyone selling options on the assumption that the range will hold is exposed to exactly those days.
And it is only as good as the implied volatility behind it. Expensive options give a wide range. Cheap ones give a narrow range. Neither tells you whether the market has priced the stock correctly.
What people get wrong
The most common mistake is treating the range as a target. Some traders buy calls expecting the stock to reach the top of the band. Others sell strangles just outside it and assume the band protects them. Both misread the number. It describes the size of move the market is paying for. Under the textbook assumption, something bigger has about a one-in-three chance.
The second mistake is mixing timeframes: using a monthly implied volatility to judge a weekly trade, or forgetting that the square root term shrinks the range as expiration nears. Related terms: implied volatility, the straddle and extrinsic value. The last one is where implied volatility does its work on the premium.
Readers also ask
How accurate is the expected move?
It is the market's estimate of size, set by option prices, and it carries no view on direction. Under a normal distribution about two-thirds of outcomes would finish inside a one standard deviation range, yet real returns have fatter tails, so moves beyond it happen more often than that model suggests.
Does the expected move include weekends?
The standard formula divides calendar days by 365, so weekends and holidays are in the count. Some traders prefer counting only trading days for short periods, because the market is shut on weekends, and the two methods give slightly different ranges for the same expiration.
Is the straddle price the same as the expected move?
They are close relatives. The at-the-money straddle price is a fast read of the size of move priced into the options, which makes it popular around earnings, while the formula works from implied volatility and time directly. The two figures land near each other and rarely match exactly.