What is the Expected Move? Definition, Formula, and Example
The expected move is the one-standard-deviation price range the options market implies for a stock over a given period, calculated from the at-the-money straddle price or implied volatility.
Expected Move Definition
The expected move is the price range, up and down, that the options market assigns a roughly 68% probability of containing the stock's price by a given expiration. It is the market's own forecast of magnitude — not direction — derived directly from option premiums. When a trader says "the market is pricing a $12 move into earnings," that number is the expected move, and it is the single most-used benchmark for deciding whether an option strategy is cheap or expensive relative to the event.
How the Expected Move Is Calculated
Two standard methods exist.
Method 1 — Straddle price (event/short-dated):
Expected Move = ATM call price + ATM put price
The straddle price approximates one standard deviation because it is the sum of the market's payment for upside and downside movement. Many desks refine this by multiplying by 0.85 to convert the straddle (which prices the average absolute move) into a true 1-sigma band.
Method 2 — Implied volatility scaling:
Expected Move = S × IV × √(T/365)
where S is the stock price, IV is at-the-money implied volatility in decimal form, and T is calendar days to expiration. This is the direct application of the square-root-of-time rule from the Black-Scholes model.
Worked Example
NFLX trades at $700 three days before its earnings report. The weekly at-the-money $700 straddle prices at $28.00 call + $28.50 put = $56.50. The expected move is $56.50, or 8.1% of spot, giving a 1-sigma range of $643.50 to $756.50 by expiration.
Using Method 2 as a cross-check: IV on the weekly ATM options is 62%. Expected move = 700 × 0.62 × √(3/365) = 700 × 0.62 × 0.0907 ≈ $39.4. The straddle-based number exceeds the pure IV scaling because earnings-week IV embeds a jump premium the smooth square-root model understates — the straddle price is the honest number for a binary event.
If Netflix reports and opens at $720, the move is $20 — well inside the $56.50 expected move. Straddle buyers lose; short strangle sellers outside $643.50/$756.50 keep their premium.
When Traders Use the Expected Move
- Earnings trades: Comparing the implied expected move to the stock's historical average earnings move reveals whether options overprice or underprice the event. Stocks routinely move less than priced — this is the structural edge behind selling premium into reports.
- Strike selection: Credit-spread sellers place short strikes at or beyond the 1-sigma boundary; a short iron condor with wings outside the expected move starts with roughly a 68% probability of full profit before adjustments.
- Position sizing: A swing trader holding through a binary event uses the expected move to stress-test portfolio P&L against a 1-sigma adverse gap.
- Target setting: The expected move defines realistic profit targets — expecting a 15% rally when the market prices 6% is a low-probability plan.
Limitations and Common Misconceptions
The expected move is a one-standard-deviation band, not a ceiling. Roughly 32% of outcomes land outside it by construction, and fat-tailed assets breach it far more often. It also says nothing about direction — it is symmetric by construction even when volatility skew shows the market fears one side more. Traders also misuse it by treating the weekly straddle as the "earnings move" for multi-week holds; the expected move is only valid for the specific expiration measured. Finally, the band decays with IV — an expected move calculated Monday is stale after an IV crush on Wednesday.