Expected Move Calculation

If you’re trading at earnings, you’re principally concerned with the magnitude of directional movement post-announcement. Now, in english: you’re worried about how much the stock your trading will move once earnings results come out. There are a few good ways to predict this, most notably by using the super-powered trading platform you’ve got on the screen in front of you (we prefer thinkorswim). 

If you’re not using a super-powered platform, or if you just like doing a little math in your head, we’re going to teach you how to get a “best guess” for expected move without doing anything other than a little addition and dividing by 2. 

Start with the at-the-money strike price for the options in question (these are the options that expire just after earnings). Now, take the price of the at-the-money call and the at-the-money put and add them together (this is called the at-the-money straddle). Next, take the price of the call with the next highest strike price (out-of-the-money) and the price of the put with the next lowest strike price (out-of-the-money). Add them together, and you have an out-of-the-money strangle. 

Last, add the prices of the at-the-money straddle (call + put, same strike price) and the out-of-the-money strangle (call + put, one strike out-of-the-money) and divide by two (you’ve taken an average). This is the amount that the market expects the stock to move up OR down by options expiration, and is a reasonable guess at the expected earnings move (the earnings move is likely expected to be a little less than this if there is time between the earnings release and expiration). 

So add the average to the current stock price, then subtract it, and consider that range your “one standard deviation” range - this just means that, about 68% of the time, the stock will finish earnings within this range. You can trade accordingly - by trying to set your breakeven points outside that range (if you’re selling options) or inside that range (if you’re buying options).