Two ways to read the expected move
Option prices carry a forecast of how much a stock is likely to move before expiry. There are two common ways to pull it out, and they answer slightly different questions.
1 SD move = price × implied volatility × √(days to expiry ÷ 365)
From implied volatility. Implied volatility is quoted as an annual figure. Scaling it by the square root of time gives the size of a one-standard-deviation move for the period. Under the model’s assumptions the price finishes inside that range about 68% of the time, and inside twice that range about 95% of the time.
From the at-the-money straddle. Buying the call and the put at the strike nearest the current price costs roughly what the market expects the average move to be, up or down. It is a direct, model-free reading of what traders are paying for movement, which is why it is the number usually quoted before earnings.
Why the two numbers differ
The straddle price is smaller than the one-standard-deviation move, and that is not an error. The straddle pays the size of the move, whatever it turns out to be; the standard deviation is a wider measure that large moves pull up. Under the normal distribution the average size of a move is about 0.8 of one standard deviation (exactly √(2/π) ≈ 0.798).
In the default example, a $150 stock with 45% implied volatility and 7 days to expiry has a one-standard-deviation move of $150 × 0.45 × √(7/365) ≈ $9.35, or 6.2%. A straddle priced to match that volatility costs about 0.798 × $9.35 ≈ $7.46, a 5.0% move. The calculator also works backwards: enter the straddle price and it shows the volatility the market is really charging, which you can compare with the quoted implied volatility.
Many traders use a rule of thumb that the expected move is about 85% of the straddle, or simply the straddle price. Both are approximations of the same relationship. What matters is using one method consistently when you compare stocks or dates.
Earnings: is the move expensive?
Before an earnings announcement, implied volatility rises because a large move is likely on one specific day. After the announcement it collapses, whatever the stock does. That collapse is the implied volatility crush, and it is why a correct call on direction can still lose money on a long option.
The useful comparison is between the move the options price and the move the stock has actually made on past announcements. Look up the stock’s average absolute move over the last eight or so earnings dates and enter it:
- Straddle move well above the historical average: options are pricing more movement than the stock usually delivers. Buying options into the event needs a bigger-than-usual move to pay.
- Straddle move below the historical average: movement is cheaper than it has been. That is when long straddles or strangles have historically had the better chance, though past moves do not guarantee the next one.
Use the expiry that falls just after the announcement; a later expiry mixes the earnings move with ordinary movement and makes the implied move look larger.
Using the range to plan a trade
The expected move is most useful as a yardstick rather than a prediction. It helps to set strikes for spreads and iron condors (short strikes outside the one-standard-deviation range are expected to finish out of the money about two times in three), to judge whether a target price is realistic in the time available, and to size a position so that a two-standard-deviation move against you is survivable. The options profit calculator shows the payoff of the strategy you choose at each of those prices.
Limits of the model
The ranges assume returns follow a normal distribution with constant volatility. Real markets have fatter tails: moves of three or four standard deviations happen far more often than the model says, especially around earnings, takeovers and macro shocks. Treat the 95% range as a guide to ordinary outcomes, not a floor or a ceiling.
Use calendar days for the time input, because implied volatility is quoted on a calendar-year basis. Dividends, interest rates and the difference between the nearest strike and the current price all nudge the straddle slightly, which is why the two methods rarely agree to the cent.