Understanding and calculating the expected move of a stock/etf/index

Understanding and calculating the expected move of a stock/etf/index

Koen Hoorelbeke

Investment and Options Strategist

Summary:  Whether you're an investor or a trader, understanding the expected move of an asset can provide valuable insights into market expectations and potential price fluctuations. By looking at options we get better insights on how the market anticipates current and future movements of any asset like stocks, etf's, indices and more


Consider a stock that's currently trading at $100. If the expected move over the next month is $5, this means the market anticipates the stock could reasonably trade between $95 and $105.

For example today's expected move of the Nasdaq is plus or minus $126.07. Compared with it's expected move of yesterday, which was at $85.18, we know by looking at those numbers that the market anticipates a more volatile day than yesterday.

Another example could be the expected move of Nvidia. Suppose you want to know where the market thinks Nvidia will be trading during the coming year. Using options/implied volatility you can calculate that the market expects Nvidia will be in a range of it's current price of $421.03, plus or minus $146.72.

Does this mean that the price of Nvidia will be between $274.31 and $567.75? No! It could, but it's certainly not a garantuee. It's just an indication of a range where the stock will be trading in, according to market expectations at this moment.

What is the Expected Move of an Asset?

The expected move of a stock or any other asset is a range within which the price is likely to stay over a certain period, based on the market's current expectations.

It's a concept derived from options pricing and reflects the market's collective prediction of the stock's volatility. The expected move is useful for any investor or trader looking to understand potential price ranges.

How to Calculate the Expected Move

There are two common ways to calculate the expected move:
Using Implied Volatility: The standard method involves using the stock's implied volatility. The formula is:

Expected Move = Stock Price * Implied Volatility * Square Root of (Time until expiration / 365)
    Using the formula above:
    Stock Price (AEX index in this case): 753.39
    Implied Volatility (mid volatility, showed in the option chain): 13.86
    Time until expiration: 42
    Expected Move = 753.39 * 13.86/100 * square root of (42/365) = +/- 35.42
   
The Quick and Dirty Way: A simpler method involves looking at the price of an at-the-money (ATM) straddle
(a strategy that involves buying a call and a put with the same strike price and expiration date).
   
    This method is less precise but can be calculated quickly and easily.
   
    Using the quick calculation:
    Expected Move = (13.30 (cost of ATM Call) + 16 (cost of ATM Put) ) = +/- 29.3

How to Use the Expected Move

The expected move can be used differently by investors and traders:

For Investors:
- The expected move can help investors assess whether their expectations align with the market's predictions. If in the example above you think the AEX will go above 850, you know that your expectations are a lot higher than what the market thinks (753 + 35 = 788). Are you too optimistic, or do you know something the market doesn't know? Are you right or is the market better at predicting? Only future will tell. But at least now you have an extra indicator.
- It can also be used to help set take profit or stop loss levels that are in line with market expectations. For example, if you are bullish on the AEX (in the coming 42 days) and you set a stop-loss at 740, you know that this stop-loss could easily be hit as the market anticipates a bigger move in that same time-frame.
- Comparing with previous expected moves of earlier timeframes, it can show whether or not the current timeframe will be more volatile/eventful.

For Traders:
- For options traders, the expected move can guide the selection of strike prices for a lot of strategies like vertical spreads, strangles, iron condors, and many more. For example, a very common way of determining the width of a short strangle is to sell the call and the put outside of the expected move range. In the example above you would set the strike of the call at >785 and the strike of the put <725.
- Another common use is to see what the market expectations are around important events, like earnings reports, or inflation numbers being published.
- Like investors, traders can also use the expected move to check if their expectations align with the market's.

Conclusion

Understanding the expected move of a stock can provide valuable insights into market expectations and potential price fluctuations. However, it's important to remember that the expected move is just that - an expectation. The actual price movement can sometimes be far off from the expected move, especially in volatile markets.

As with any tool, the expected move should be used in conjunction with other analysis methods and not relied upon in isolation.

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992