Every earnings season, traders and investors alike get caught up on the idea of the “options implied move”, sometimes also referred to as the “expected move” over a stock’s earnings report (ER). The implied move is actually pretty simple to define and understand. Its basic definition is the amount (defined in percentage) that a stock is predicted to increase or decrease over a binary event, such as an earnings report. The predicted value is based upon implied volatility. For example, if stock $XYZ has an implied move of 6% over earnings (a binary event), that means traders and investors are predicting the stock to move 6% in either direction over its ER. This data is particularly important if a trader is looking to make a trade based on earnings. I discuss trading over earnings in this article.
How It Is Calculated
The implied move of a stock for a binary event can be found by calculating 85% of the value of the nearest monthly expiration (front month) at-the-money (ATM) straddle. This is done by adding the price of the front month ATM call and the price of the front month ATM put, then multiplying this value by 85%. Another easy way to calculate the expected move for a binary event is to take the ATM straddle, plus the first out-of-the-month (OTM) strangle and then divide the sum by 2. Thankfully we never have to calculate this by hand, as we have up to the minute implied move values available online and within the Trader’s Thinktank.
It is important to note that we only use implied move for a binary event. The accuracy of implied volatility crush after earnings (AKA premium crush) and all of the variables associated with implied volatility are far too complex to accurately reflect the implied move for a longer time period.