During each earnings season, traders and investors often focus their attention on a crucial metric: the "options implied move" or "expected move" of a stock's earnings report (ER). This metric is vital for making informed decisions in the world of trading. In this article, we will delve into the concept of the options implied move, explaining how it's calculated and why it matters.

Defining the Options Implied Move

The options implied move is a straightforward concept. It represents the expected percentage change in a stock's price during a significant event, such as an earnings report. This prediction is primarily based on implied volatility. For instance, if stock $XYZ has an implied move of 6% for its upcoming earnings report, traders and investors anticipate that the stock will experience a 6% price swing in either direction. This data holds significant importance for traders looking to capitalize on earnings-related opportunities.

How the Options Implied Move is Calculated

Calculating the implied move for a stock ahead of a binary event involves a specific formula. 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 method involves adding the ATM straddle to the first out-of-the-money (OTM) strangle and dividing the total by 2. Fortunately, traders today don't need to perform these calculations manually, as up-to-the-minute implied move values are readily available online (in your brokerage) and within resources like the Trader's Thinktank.

Using Implied Move for Binary Events

It's important to emphasize that implied move is primarily employed for binary events, such as earnings reports. Attempting to apply it over longer time frames can lead to inaccuracies due to the complex variables related to implied volatility and premium crush after earnings.

Conclusion

In conclusion, the options implied move serves as a critical tool for traders and investors during earnings season. It offers valuable insights into the expected price fluctuations of stocks around binary events like earnings reports. Understanding how to calculate and use this metric can empower traders to make more informed decisions and navigate the volatile world of stock trading with confidence.