Implied move / sqrt(2/pi) gives you a standard deviation of 5.6%
The chances of a 7% move ($3.6/50) assuming a normal distrobution is 11%.
The chances of a 7% move ($3.6/50) assuming a normal distrobution is 11%.
Basic Options Question
- Thread starter BearAtlas
- Start date
Where did you get the implied move from? Sorry if this is a dumb question
Definitely not a dumb question! There is no perfect answer, in fact most implied move models I have come across are horrible! I do not have time right now to go into detail or know if I should post it. But you calculate implied move by subtracting non event volatility from the total volatility. The hard part is figuring out what the non event volatility is. This is a crucial part when days to expiration becomes larger. For an option that has 1-3 days until expiration, you can just use the price of the straddle for a not so dirty approximation. Most models you see will assume constant volatility between expirations (this is really really bad) as an example, INTC on the bloomberg terminal today was implying a 6.9% move using the Feb1st and Feb8th expiration. Like that was just horribly wrong! ThinkOrSwim offers a similar implied move which I have seen go WAY out of whack!
Why is that? It's a very nice way to compare event volatility. It is also nice to work with when comparing dollar moves rather than percent moves. Maybe you have not used it correctly?
I am not a math-heavy quant but I came across it several times, especially when using some coding libraries that provide greeks and doing my code around them. But indeed I don't use much stuff that everyone else may be using, including greeks themselves. My goal is to discover things that most people don't use or don't look at. For example I derive things like option "$overpricing" (aka IV but in different units) only by looking at the price of option combos, especially as I trade mostly combos and can recognize when they may be mispriced, which may not even directly relate to individual options' IV. Occasionally when I trade single options or basic spreads on things like UVXY, I may measure the potential ROI. While say, looking at the market's expected move doesn't seem to give me anything meaningful because it is me that need to project my own expected move and evaluate the potential ROI (say 40%). If I see potential of getting such ROI and entering the position then by default it means that I'm trying to arbitrage away people who use the market's expected move and will lose on it (if I'm right).
And I suspect tat if expected move had any useful meaning then it would provide an edge, while commonly known edges are not edges or get arbitraged away (?).
(I also use things like my own derived option decay in % per day/week/month vs Theta that as a number doesn't tell me anything - as an example that I try to do things differently and do not use greeks or common terms per-se, which I suspect makes me see things differently, or at least look at stuff that not everyone else looks at).
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Expected move calculation was never intended to be an edge. Its derived from implied volatility. You use it to see what the market is thinking. Then you make an assumption if that is cheap or expensive. Just like implied vs realized vol.
I am not to sure if rearranging formulas give you an edge. Most edges comes from unique data sets, technology, network, experience etc..
I am not to sure if rearranging formulas give you an edge. Most edges comes from unique data sets, technology, network, experience etc..
Why not buy far dated(6months+) Deutsche Bank puts for massive returns!