The size of move the option market is pricing for a given period, usually approximated by the at-the-money straddle price.
The quick estimate is the at-the-money straddle plus the first out-of-the-money strangle, or simply the straddle price times about 0.85. The more formal version multiplies price by implied-volatility and by the square root of time in years.
It is a one standard deviation figure, which means the market expects the underlying to finish outside that range roughly a third of the time. Traders who treat the expected move as a boundary rather than a rough band are misreading it by design.
Example: XYZ at $50 with the 30-day straddle at $4.40. The expected move is about $3.75, so the market is pricing a range of roughly $46.25 to $53.75 over the month. Using the formula instead: 50 × 0.25 × √(30/365) = $3.58, close enough for position sizing.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Long straddle: payoff at expiry. A 100 call and a 100 put bought together for 8 make a V. A quiet market that ends near 100 costs the whole 8; the position only turns positive once the price finishes below 92 or above 108, whichever way it goes.Working out a position size. Three numbers decide how big a trade is: the account, the share of it put at risk, and the distance from entry to stop. One percent of $25,000 is a $250 budget, and a $0.50 stop divides into that 500 times.
Educational only, not advice. Spotted an error? Post in Site Feedback.