How to calculate expected move based on Implied Vol?

[optrader782]

Good Afternoon, I hear all the time that a stocks expected move is xx% based on implied vol of xx% i was wondering how to calculate expected move based on implied vol?

Joe

More answers here.
http://www.elitetrader.com/vb/showthread.php?s=&threadid=228352

 

[traderlux]

Quote from optrader782:

Good Afternoon, I hear all the time that a stocks expected move is xx% based on implied vol of xx% i was wondering how to calculate expected move based on implied vol?

Joe

...spin, can you help joe?....

 

[newwurldmn]

Roughly divide implied vol by 16

 

[gtor514]

Are you talking about the expected move of the underlying in N days? If so this may be what you want to take a look at.

http://www.ivolatility.com/news/Putting_volatility_to_work.pdf

 

[billsafari]

This came straight from optionsmonster.


What you would do is add together the ask price on the at the money strikes for both calls and puts, effectively pricing out the “straddle”. So if Exxon is at $70, you’d look at the 70 strike for both calls and puts (for the front month aka the month that will expire soonest). So lets say the $70 calls are going for 2 dollars and the $70 puts are going for 2.50, then there is a price of $4.50 for the straddle. You’d divide the straddle price by the price of the underlying to get the expected move.



In the above example, $4.50/$70 is a 6.4% move

If the price is not on the strike then you woud use the closet strike.

 

[spindr0]

Quote from billsafari:

This came straight from optionsmonster.

What you would do is add together the ask price on the at the money strikes for both calls and puts, effectively pricing out the “straddle”. So if Exxon is at $70, you’d look at the 70 strike for both calls and puts (for the front month aka the month that will expire soonest). So lets say the $70 calls are going for 2 dollars and the $70 puts are going for 2.50, then there is a price of $4.50 for the straddle. You’d divide the straddle price by the price of the underlying to get the expected move.

In the above example, $4.50/$70 is a 6.4% move

If the price is not on the strike then you woud use the closet strike.

I think that optionmonster's formula is simply calculating the amount of move (percent) needed to break even at expiration.

I would surmise that the expected move is something along the lines of:

IV x Sq Root of time until exp x Price

 

[tradingjournals]

0.8*absoluteIV.

 

[Broch]

{VIX/20 * Close/100} +/- Close

1/5 is new. 25% of the range is standard deviation. So, both.

 

[sle]

Quote from optrader782:

Good Afternoon, I hear all the time that a stocks expected move is xx% based on implied vol of xx% i was wondering how to calculate expected move based on implied vol?

IV * sqrt(time) would give you a single sd move, if thats what you're asking for. E.g. "S&P will move 2.1% tomorrow - that 2.1% = IV(ATM) * sqrt(1 day /252)".