Advanced 01 · Advanced
The Expected Move
What the options market thinks is going to happen
The options market publishes its own forecast of how far a stock will travel, and it does it continuously, for every expiration, on every liquid name. Once you can read it, you stop guessing whether a target is reasonable.
The estimate lives in the at-the-money straddle — the call and the put at the strike nearest the stock price, added together. That combined premium is what the market charges for a bet that the stock moves in either direction, which makes it the market's own estimate of how far it goes.
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What the market thinks the move will be
The at-the-money straddle — one call plus one put at the money — is the market's own estimate of how far the stock travels by expiration, in either direction.
What it is actually for
Three uses, in ascending order of how much they will change your trading.
Sanity-checking a target
If your thesis needs a 9% move by Friday and the market is pricing 3%, you are not being ambitious — you are betting against the collective estimate of everyone pricing that contract. That can be right, but it should be deliberate.
Choosing a strike
A strike beyond the expected move is, by the market's own reckoning, unlikely to be reached. That is exactly why it is cheap. The expected move turns 'this looks affordable' into 'this is priced outside the likely range', which is a different sentence.
Understanding what an event costs
Before earnings, the expected move is large and the options are expensive because of it. Buying a call there is not just a bet that the stock rises — it is a bet that it rises more than the amount already priced in. Meeting the expectation is not enough.
Around events
Earnings, CPI, FOMC and the scheduled releases that move an entire index all show up in the expected move days ahead. The number swells as the date approaches and collapses the moment the news is out.
The useful discipline: write down the expected move before the event, then compare it to what actually happened afterwards. A handful of those comparisons teaches more about options pricing than any amount of reading, because you find out how often the market's estimate was roughly right.
Where this goes next
The expected move tells you how far the market thinks price travels. It does not say anything about where it is likely to stall, reverse or accelerate on the way. That is a question about positioning rather than pricing, and it is the subject of the final module.