Mastering the Expected Move: How to Use This Little-Known Concept to Gain an Edge in Trading + Prep for Wednesday, March 22nd, 2023
Prep for tomorrow and review of today.
As traders, we're always looking for an edge. That's why understanding the expected move can be a game-changer. This little-known concept can give us valuable insights into a stock's potential price range, which we can then use to inform our trading decisions. In this post, we'll break down what the expected move is, how to calculate it, and most importantly, how to use it to our advantage in the markets. Tonight we are detailing some of those finer points, how we’ve used and of course you can find the daily levels below.
Quick housekeeping. We are going to out of pocket most of the first week in April and there will be no posts or updates during that time period.
As you may have seen we have worked live prep to our morning routine and intend to continue again tomorrow morning starting around 5:45 US CST Live prep. During our prep we walk through our prep zones for the day including $SPY, $QQQ, $VIX, $SVXY, $ES_F, $NQ_F, $RTY_F, $YM_F along with $CL_F and $GC_F.
Mastering the Expected Move: How to Use This Little-Known Concept to Gain an Edge in Trading
Introduction: Have you ever heard of the "expected move"? This key concept in options trading can be a valuable tool for traders looking to assess risk and potential reward. In short, the expected move is a measure of the amount that an underlying asset (such as a stock) is expected to move over a certain period of time, based on the prices of options contracts.
In this article, we'll explore how traders can use the expected move to their advantage in the markets. We'll cover a range of topics, from basic definitions and calculations to specific trading strategies that incorporate the expected move. Whether you're a seasoned options trader or just getting started, understanding the expected move can be a valuable addition to your trading toolkit. So let's dive in!
Section 1: What is the Expected Move?
The expected move is a prediction of how much a stock or other financial instrument is expected to move, up or down, over a given time period. It is calculated by analyzing the implied volatility of options contracts, which represent the market's expectations for the stock's price movement. The expected move is typically expressed as a percentage of the stock's current price.
For example, let's say a stock is trading at $100 and its implied volatility suggests an expected move of 5%. This means the market expects the stock to move either up or down by $5 over a given time period.
The expected move is a valuable tool for traders because it provides a baseline for estimating how much a stock is likely to move. This information can be used to manage risk by adjusting position sizes, setting stop-loss orders, and determining profit targets.
In addition to being useful for managing risk, the expected move can also be used to adjust trading strategies. For example, if a trader is considering a certain options strategy, they can use the expected move to estimate the potential profit and loss for the trade. This can help them make a more informed decision about whether or not to enter the trade.
Overall, the expected move is an important tool for traders to have in their toolkit. It provides valuable information about the potential movement of a stock or other financial instrument, which can help traders manage risk, adjust strategies, and make more informed decisions about their trading.
Section 2: Using the Expected Move in Trading
Estimating Risk: The expected move can be used to estimate the potential risk in a trade. Traders can use this information to adjust their position size or choose more appropriate options contracts that are within their risk tolerance.
Setting Profit Targets: The expected move can also be used to set profit targets. Traders can use the expected move to determine where they should place their take-profit orders, as the move beyond the expected move level could indicate a potential reversal or a shift in market sentiment.
Trading Volatility: The expected move is closely related to volatility, and traders can use it to trade volatility by buying or selling options contracts. When the expected move is high, implied volatility tends to increase, and traders can sell options to benefit from the increased premium. Conversely, when the expected move is low, traders can buy options to benefit from any potential volatility spikes.
Using Iron Condors: The expected move can be particularly useful for trading iron condors, which is a popular options strategy that profits when the underlying asset remains within a certain range. Traders can use the expected move to determine the width of the range they want to trade within and set their short and long strikes accordingly. By doing so, traders can increase the probability of their iron condor strategy being profitable, as they are trading within the expected move range.
Section 3: Real-World Examples
To give you a better sense of how the expected move works in practice, let's take a look at a few real-world examples:
Company Earnings: One common use of the expected move is to gauge the potential impact of earnings announcements on a stock's price. For example, if the expected move for a particular stock is $5, and the company reports earnings that exceed expectations, the stock price may rise by up to $5. Conversely, if the company reports disappointing earnings, the stock price may drop by up to $5.
Market Events: The expected move can also be used to evaluate the potential impact of broader market events, such as interest rate changes or geopolitical developments. By examining the expected move for different stocks or asset classes, traders can get a better sense of how those events may affect the markets as a whole.
Options Trading: Finally, the expected move is a crucial component of many options trading strategies, particularly those that involve selling options. By calculating the expected move, traders can set appropriate strike prices for their options contracts and ensure that they are adequately hedged against potential losses.
Actionable Tips: Below are some actionable tips:
Now that we've covered the basics of the expected move and how it can be used in trading, let's look at some actionable tips for incorporating it into your own strategy:
Use the expected move as a guide for setting stop-losses and profit targets. By setting your stops and targets based on the expected move, you can better manage your risk and avoid getting caught off guard by unexpected price movements.
Incorporate the expected move into your options trading strategy. Whether you're selling options or using them to hedge your positions, understanding the expected move can help you make more informed decisions and avoid costly mistakes.
Stay up-to-date on market events and earnings announcements that may impact the expected move. By monitoring these events, you can adjust your trading strategy as needed and stay ahead of potential market moves.
Remember that the expected move is just that - an estimate. While it can be a valuable tool for evaluating potential risks and rewards, it's important to be aware that actual market movements may differ from the expected move.
Put maybe another way and a strategy we use ourselves, is to use the expected move to identify potential entry points for options spreads. For instance, if a stock is approaching its expected move level early in the week without any significant news, one could look for opportunities to take a bear call spread or bull put spread. This strategy involves evaluating key pieces of evidence in the stock, along with the expected move details, to make a calculated entry decision. Now, as a reminder nothing we’ve covered in our post and any other post is ever meant to convey buy or sell recommendations nor guarantees of any kind of performance results.
Conclusion: The expected move is a powerful concept in options trading that can help traders manage risk and capitalize on potential opportunities. By calculating the expected move and incorporating it into your trading strategy, you can better manage your positions and avoid getting caught off guard by unexpected price movements. Whether you're a seasoned trader or just getting started, taking the time to understand the expected move can be a valuable investment in your trading future.
Related to these book recommendations, we would suggest checking out an Audible 30 day trial on Amazon. Yes we know it may sound cheesy and yes we are an affiliate there, but having now used the past month+ on our evening walks it’s been a game changer. We’ve been using audible to listen to various books and it’s been really fruitful.
As we’ve noted before we are building this from the ground up and our intention is to continuously add and improve. As always, we recommend doing your own research and consulting with a financial advisor before making any investment decisions, as nothing we say or suggest should be taken as a recommendation to buy, sell, or hedge any financial instruments (full disclosure here).
Tomorrow’s prep / high interest zones:
Next are the key tickers and price zones broken into categories of Breadth, Overall, Meme, Forex / AG futures. Further below you can find the section for Expected moves (aka cheat codes) and the symmetrical extremes. If you need a summary/reminder of what these zones mean, see our earlier post.
High interest tickers & zones:
Breadth
NVDA [266.42 - 265.15]
SPY [397.43 - 395.97]
MDY [439.76 - 438.65]
SVXY [62.02 - 61.39]
QQQ [308.15 - 307.39]
AMD [99.51 - 98.75], [90.85 - 90.11]
ES_F [4057.25 - 4048.00]
JPM [135.06 - 134.81]
NQ_F [12696.25 - 12650.00]
FAZ [22.67 - 22.55]
TSLA [211.90 - 211.36], [199.06 - 196.99]
XBI [77.22 - 76.98]
KBWB [40.59 - 40.34]
ZB_F [131'12 - 130'28], [128'31 - 128'20]
Overall
NKE [122.81 - 122.38]
KMB [130.23 - 129.92]
ONB [14.60 - 14.49]
MCK [338.17 - 337.75]
WEC [94.59 - 93.97]
EXPO [99.66 - 98.93]
CSIQ [45.15 - 44.65]
OEX [1838.20 - 1837.10]
FLR [30.17 - 30.14]
NDX [12648.46 - 12626.73]
GLW [34.83 - 34.76]
WMB [29.43 - 29.30]
MET [60.74 - 60.48]
KRTX [177.81 - 175.87], [161.73 - 156.63]
VRSK [187.44 - 186.79]
MMC [164.00 - 163.81]
ADI [185.00 - 184.58]
TSM [93.02 - 92.90]
GPN [105.94 - 105.52]
SPSC [151.35 - 151.00]
FOREX Futes (these have now rolled to June contract)
6N_F [0.62990 - 0.62955]
AG Futes (these have now rolled to June contract)
ZM_F [452.4 - 451.2]
HE_F [76.750 - 76.550]
Meme
None for tomorrow.
Expected move levels for tomorrow
And since our article tonight is about Expected Moves, here were our expected move calculations from January this year for last week’s opex.
Symmetrical extreme readings
In a future post we will delve further into what these mean, but you can also check out things such as Disparity Index to understand some of the basics.
Today’s review
Moved this below prep as it’s probably less serving for most folks.
Journaling side
Pretty exhausted from today, might add journal post-mortem later this week.
That’s all for tonight folks…just a reminder, our goal is to constantly improve and refine our proprietary AI system + this content. These tools analyze hundreds of tickers to identify high-interest areas based on multiple areas of confluence evidence. As always, we recommend doing your own research and consulting with a financial advisor before making any investment decisions, as nothing we say or suggest should be taken as a recommendation to buy, sell, or hedge any financial instruments (please read our disclaimer ).
Tools / Affiliates / etc.
Affiliates:
We are an affiliate with ApexTraderFunding.
We are an affiliate with TastyWorks.
Tools used/shown:
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