Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

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

1 min read

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 ramp up in option volatility is the investors getting into hedging mode due to the uncertainty of the event and speculators betting on the future directional move which causes the Implied volatility to spike up.

Once the Binary event is over, markets are back to certainty which makes investors to remove their 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.

For Example Current Nifty Spot Price is 9674.80 so the ATM strike price is 9650.

Now the cost of the ATM straddle is = Cost of 9650CE + Cost of 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.

Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

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6 Replies to “How to Calculate the Expected Move for a Stock/index?”

    1. 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.

  1. Good Article Rajandran,

    I have one observation here. As you are explaining the expected move on binary events, don’t you think the move based on IV (3rd point) is not correct. IV based move gives 1 SD move range for a remaining DTE. According to my observations it always gives to more the 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.

    1. 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

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