Options Traders' Must-Have: Mastering the Expected Move

As a professional options trader for over 20 years, I've come to rely on a handful of essential tools, especially when working with options selling strategies.

One of these critical tools is the Expected Move, also known as the Expected Range.

As someone who predominantly uses options selling strategies, I must know a stock's or ETF's expected move before I place a trade. This knowledge has been crucial to my success over the past 20+ years.

But what exactly is the Expected Move?

The expected move refers to the projected price range an underlying asset is anticipated to trade within over a specific time frame, often based on implied volatility. It's a statistical estimate derived from options pricing models, most commonly used to gauge how far the market expects the stock or index to move.

Think of it as a glimpse into a security's likely future price range over a specific time frame.

Important Insights:

1. Probability Basis:

   • The expected move represents a 68% probability range (1 standard deviation) for the underlying asset's price by expiration.

   • Example: If the expected move is ±$5, the stock is statistically likely to trade within $5 above or below the current price about 68% of the time.

2. Directional Neutrality:

   • The calculation assumes no directional bias. It reflects potential movement up or down, not a prediction of the direction.

3. Influence of IV:

   • Higher implied volatility increases the expected move, reflecting greater uncertainty about the underlying asset’s price.

4. Shorter Time Frames:

   • Expected move decreases as the time to expiration shrinks, emphasizing short-term market stability unless volatility is elevated.

Let's break it down with a quick example.

For this example, I’m considering a potential trade going out 30 to 60 days. I want to look at the options chain for the S&P 500 (SPY) ETF, specifically for the February 21, 2025, expiration cycle with 46 days left until expiration.

Understanding the Expected Move for SPY: February 21, 2025 Expiration

The expected move is a critical metric for options traders, estimating the range in which a stock or ETF is likely to trade within a specific period. It is based on implied volatility and is particularly useful for planning trades. Here’s an example using SPDR S&P 500 ETF Trust (SPY) options expiring on February 21, 2025.

Formula for Expected Move:

Expected Move = Current Price × Implied Volatility × √(Days to Expiration ÷ 365)

Parameters Used:

• Current Price (SPY): $595.36 (as of January 6, 2025)

• Implied Volatility (IV): 13.52% (0.1352)

• Days to Expiration: 46

Step-by-Step Calculation:

1. Calculate the time factor: √(46 ÷ 365) ≈ 0.354

2. Multiply: 595.36 × 0.1352 × 0.354 ≈ 28.50

The expected move is approximately ±$28.50.

What Does This Mean?

By February 21, 2025, SPY is expected to trade within the range of:

• Lower Bound: $566.86 ($595.36 - $28.50)

• Upper Bound: $623.86 ($595.36 + $28.50)

Why Does This Matter?

• Risk Management: The expected move helps traders set realistic expectations for price fluctuations and position sizing.

• Earnings and Volatility: It reflects how market participants are pricing in uncertainty over the next 46 days.

• Strategy Development: For strategies like iron condors or vertical credit spreads, traders can align their strikes with levels outside the expected range to increase probabilities of success.

Bullish Scenario

From the image above, we know that the expected move in SPY is between 567 and 624.  If I'm feeling bullish and want to use a risk-defined trade, I might consider a bull put spread (or short put vertical spread). My preference is often to place this spread outside of the expected range, say below the 567 put strike.

By venturing beyond the expected move, I increase my probability of success. For example, choosing a short put strike of 566 could give me a probability of success of 81.50%. Of course, I could tweak this further to increase my probability, though it will most likely decrease my potential profits.

For example, implementing a 5-strike wide bull put spread using the 566/561 put strikes offers a profit potential of approximately $50 per spread, equating to a return of 11.1%. No doubt, a conservative trade. The trade's probability of success remains at 81.5%, while the probability of touch—the likelihood of the underlying reaching the short strike during the trade—stands at 37.8%.

Bearish Scenario

Similarly, if I have a bearish outlook and want to use a risk-defined trade, I might go for a bear call spread (or short call vertical spread). Again, I'd likely place this spread outside of the expected range, above the 624 call strike.

By stepping outside the expected move, I increase my probability of success. For instance, selecting the SPY 625 call strike gives me an 87.92% probability of success. Of course, I have the flexibility to adjust my call strike to improve my odds further, though it will affect my potential profit.

For example, implementing a 5-strike wide bear call spread using the 625/630 call strikes offers a profit potential of approximately $58 per spread, equating to a return of 13.1%. Another conservative trade. The trade's probability of success sits at 87.92%, while the probability of touch—the likelihood of the underlying reaching the short strike during the trade—stands at 23.25%.

By placing trades outside the Expected Move, I consistently enhance my probabilities while maintaining disciplined risk management, ensuring a strategic balance between success rates and potential profits. This approach underscores the importance of understanding probabilities as the cornerstone of long-term trading success.

In summary, the Expected Move is just one of the many valuable tools in my options trading toolbox. I make it a habit, as my starting point, to reference the expected move for every trade I consider, and I encourage you to do the same.

Keep your options open and your trades strategic,

Andy Crowder

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