09/02/2020 How to Calculate the Expected Move for a Stock/index?

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How to Calculate the Expected Move

for a Stock/index?
June 5, 2017 by Rajandran — 6 Comments

114

When there is a planned event like RBI announcement, FOMC meeting, Earnings Result, Major
political events like Election results, BR Exit kind of scenarios options price tends to move higher as
the implied volatility of the options gets a ramp up before any such binary event. The reason for such
We'd
ramp up in option volatility is the investors getting into hedging modelike
due toto
thenotify youof the
uncertainty
about
event and speculators betting on the future directional move which thethelatest
causes Impliedupdates
volatility to spike
up. You can unsubscribe from notifications
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09/02/2020 How to Calculate the Expected Move for a Stock/index?

Once the Binary eventTRAINING

TRADEZILLA 3.0
is over, markets are back toCOURSES
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certainty which makes investors to remove their
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hedges and that results in IV crush aka volatility crush post the event announcement. The expected
market movement range on any binary event days is called Expected Move. So how to predict the range
for any Binary Event?

There are basically three ways to calculate the expected move one is using ATM Straddle and the
another method is using Implied Volatility.

Method 1 – OAWeb (Easiest)

These easiest way without doing any calculation is login to oaweb (Option Action) -> Goto Option
Chain -> Fetch the Option Chain for the Required symbol and it automatically shows the Stock/Index
Range for the month/ Binary Event. Which you can use this information for further processing in your
trading strategies.

Method 2 – ATM Straddles

For those who dont have access to Optionaction OAweb still the calculation is easier. It can be
calculated from the 85% of the current month ATM Straddle cost and divide by the underlying stock
price to get the expected value in percentage terms as shown in the above figure.

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For Example Current Nifty Spot Price is 9674.80 so the ATM strike price
Allow is 9650. Later
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09/02/2020 How to Calculate the Expected Move for a Stock/index?

Now the cost of the ATM

TRADEZILLA 3.0
straddle isPREMIUM
TRAINING
= Cost of 9650CE + Cost ofLIBRARY
COURSES
9650PE = 106.15 + 76 = 182.91
(Expected Range in terms of points)

Expected Value = (182.91 * 85)/9674.80 = +/- 1.606 (Expected Range in terms of percentage)

Method 3 – Implied Volatility

Another way to measure the expected range is using the implied volatility (IV) or VIX as a proxy
instead of IV. The formula to calculate Expected value using IV is shown below.

where DTE = Days to Expiration (calculated in terms of calendar days)

Lets take an example. Current Nifty value is 9674.80 and the Average of ATM IV of both 9650CE and
PE is 9.285. And total days for June contract to expire is 25 days.

Hence Expected value = 9674.80 * 9.285/100 * Square root ( 24/365 ) = 1064.228 * 0.2617 = +/-
235.08 points

Now once you computed the Expected move you can play a structural option strategic play based on
the current market conditions and the prevailing volatility.

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Filed Under: Option Action

Tagged With: Binary Event, Earnings Expectation, Expected Move, Expected Range, Implied Voaltility

About Rajandran
Rajandran is a Full time trader and founder of Marketcalls & Co-Founder of
Traderscafe, trades mostly using discretionary Trading Concepts like Market
Profile, Trading sentimental analysis, building timing models, algorithmic trading models.
Instructs professional traders, full time traders & aspiring full time traders. Rajandran
attended college in the Chennai where he earned a BE in Electronics and Communications.
Rajandran has a broad understanding of trading softwares like Amibroker, Ninjatrader,
Esignal, Metastock, Motivewave, Market Analyst(Optuma),Metatrader,Tradingivew,Python
and understands individual needs of traders and investors utilizing a wide range of
methodologies.

Comments

Akshay says
June 5, 2017 at 11:10 pm

Can we do it on normal days.

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09/02/2020 How to Calculate the Expected Move for a Stock/index?

TRADEZILLA 3.0
JuneTRAINING
6, 2017 at 9:17 am
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Its better to use it during binary event days or IV based expected move can be used for a
possibly monthly expiry range.

Reply

Rajesh says
June 21, 2017 at 7:58 pm

It will work for commodity data time?

Reply

Rajandran says
June 22, 2017 at 12:44 am

It works good for instruments with options on binary event days like Major news
announcements or Earnings announcement. However it can also be used to predict expiry
range.

Reply

Akash says
September 29, 2017 at 5:06 pm
We'd like to notify you
Good Article Rajandran, about the latest updates
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anytimemove on binary events, don’t
I have one observation here. As you are explaining the expected
Allow Later
you think the move based on IV (3rd point) is not correct. IV based move gives 1 SD move
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range for a remaining

TRADEZILLA 3.0
DTE. According
TRAINING PREMIUM
to my COURSES
observations it always gives to more the
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expected range in case of binary events that means less premium collection. In Binary events
we play vol crush. I always prefer 85% of ATM straddle for binary events.

Reply

Akash says
September 29, 2017 at 5:10 pm

Hi i was reading two articles back to back so i thought your article was on binary events
only. I take my comments back . little misunderstanding. 🙂
Thanks
Akash

Reply

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