Tuesday, January 5, 2010

Expected Move Calculation

The easiest way to determine the expected magnitude of a future move in stock is to look at the implied volatility of the ATM (at-the-money) option.

To calculate the daily expected move of a stock, the Expected Move Formula is as follows:

Daily EM = Implied Volatility x Stock Price x (√252)

e.g. daily expected move for GS

GS ATM Implied Volatility = 32%
GS Current Stock Price = $172.97

Daily EM = 32% x
$172.97 x 0.06 = $3.32

Therefore GS is expected to move up or down in either direction daily by around $3.32

- by randomjaywalking


Anonymous said...

Under what circumstances do you make use EM? Can you give some e.g.?

randomjaywalking said...

EM is used to assist in selecting the correct strategy for the particular stock.

For example, for range trading options strategies (e.g. dream's short strangle) we want the stock to show stability within a trading range contained by the expected move.

For directional plays, e.g. based on TA we have a stock target price and target date, we need to calculate the expected move to gauge whether it is possible for the stock to reach target price by the target date.

Hope this helps.

Anonymous said...

Thank you, the explanation is extremely helpful. Honestly, I didn't even know such things exist.