A birds-eye view to Quantify the probability of certain stock price movements in the future by calculating expected moves and visualize expected moves over time

You might have heard the term “Expected moves” around the time of earnings announcements but all the expected move is the stocks expected price range in the future based on its current option prices.

What is a stocks expected move?  : The expected move is the one Standard deviation expected price range for a stock in the future. e.g – If a stocks 30 day expected move is 5% then the stock is expected to be +/- 5% from its current price { with a 68% accuracy). Now since this is a 1 standard deviation range the expected move is the 68% probability range for a stock of a certain time period.

To calculate the expected move for any stock you need 3 variables:-

  1. The current Stock Price
  2. The stock’s implied volatility ( matched with the time period in the calculation)
  3. The desired time frame of the expected move.

Why Match the Implied volatility and time period? : It’s important to use the implied volatility closest to your calculation period because different expirations have different Implied Volatility.Screen Shot 2018-06-17 at 4.38.08 AM

from the above image, let’s say you were going to calculate a 70 day expected move. If you’re calculating a 70 day expected move you wouldn’t want to use the 7 day IV of 27.5% because that would give you an expected move that’s overstated compared to the 24.5% IV. So when you are calculating an expected move just be conscious of the differences in Implied volatility (IV) between expiration cycles and make sure that you use the IV of the expiration cycle that’s nearest to the expected move period that you are calculating

The Expected Move FormulaScreen Shot 2018-06-17 at 4.43.59 AM.png

NOTE – If you are using trading days then you would change the denominator to 252 instead of 365 since there are 252 trading days in a year, though both calculations should give you roughly the same number so it doesn’t matter which one you use, so just be consistent.

Screen Shot 2018-06-17 at 4.47.39 AM

So as you see in the above examples the expected move for a 7-day expiration of a 200$ Stock is +/-$7.62 and would be 207.62 to 192.38 similarly the expected move value would vary for other expiration cycles in the other expiration cycles as shown above.

Screen Shot 2018-06-17 at 4.53.37 AM.png

The above graph lets you visualise the expected moves.

So to summarise once again, A stocks expected move is the magnitude of that stocks future price movements with a 68% chance of certainty ( a 1 standard deviation range), and when calculating expected moves be sure to use the implied volatility closest to your calculation period.

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Blog at WordPress.com.

Up ↑

%d bloggers like this: