Calculating Expected Move of a Binary Event

[CostaKapo]

With binary events such as earnings or FOMC etc. options traders have been calculating the expected move based on the idea that markets are efficient and pricing is always accurate.

Start with the at-the-money strike price for the options in question (these are the options that expire just after earnings). Now, take the price of the at-the-money call and the at-the-money put and add them together (this is called the at-the-money straddle). Next, take the price of the call with the next highest strike price (out-of-the-money) and the price of the put with the next lowest strike price (out-of-the-money). Add them together, and you have an out-of-the-money strangle.

Last, add the prices of the at-the-money straddle (call + put, same strike price) and the out-of-the-money strangle (call + put, one strike out-of-the-money) and divide by two (you’ve taken an average). This is the amount that the market expects the stock to move up OR down by options expiration, and is a reasonable guess at the expected earnings move (the earnings move is likely expected to be a little less than this if there is time between the earnings release and expiration).

So add the average to the current stock price, then subtract it, and consider that range your “one standard deviation” range - this just means that, about 68% of the time, the stock will finish earnings within this range.

This being said I would like to see about creating an excel sheet that is constantly updating itself based on these parameters. I am not that well versed in excel, so if someone could - please let me know if this is possible. :smart:

via http://pfd.me/2014/10/27/expected-move-calculation-binary-events-like-earnings-for-options-traders/

 

[ACstudio]

I'm ignorant where Excel is concerned. If I understand your post.... TOS does this at the top right of the options chain for each month for each derivative. And you can set your options chain to show Probability of In or Out of the money...or you can look at the deltas of the option...an option at .16 deltas is usually very close to a 1 standard deviation move out. So an iron condor setup up with the short strikes at .16 and -.16 deltas will have about a 68% chance of expiring worthless (actually more if you calculate the breakeven with credit received...so sometimes you can sell closer in and the credit received moves you out to the 1 standard deviation)......pretty much the same thing.
And Dough does it visually by showing blue dotted lines at 1 and 2 standard deviations for any underlying.

 

[CostaKapo]

I'm ignorant where Excel is concerned. If I understand your post.... TOS does this at the top right of the options chain for each month for each derivative. And you can set your options chain to show Probability of In or Out of the money...or you can look at the deltas of the option...an option at .16 deltas is usually very close to a 1 standard deviation move out. So an iron condor setup up with the short strikes at .16 and -.16 deltas will have about a 68% chance of expiring worthless (actually more if you calculate the breakeven with credit received...so sometimes you can sell closer in and the credit received moves you out to the 1 standard deviation)......pretty much the same thing.
And Dough does it visually by showing blue dotted lines at 1 and 2 standard deviations for any underlying.

AC does this page allow you to modify the variables inside the file?

http://pfd.me/2014/10/28/beta-calculator-expected-move-on-earnings/

 

[ACstudio]

I guess I'm not sure what you mean. Which probably means no.

What variables are you trying to modify?

The options pricing by the CBOE is as about as efficient as anyone would want in a liquid market. I think to change any of the variables would generate inefficiency.

The only area of inefficiency in their model that I know is in that it is built around holding until expiration and that volatility tends to be overstated in higher implied volatility environments. Both of which work in favor of premium sellers.

Or am I missing the question entirely?

 

[lloydbee]

I'm ignorant where Excel is concerned. If I understand your post.... TOS does this at the top right of the options chain for each month for each derivative.
And Dough does it visually by showing blue dotted lines at 1 and 2 standard deviations for any underlying.

TOS does it all so nicely which is why it is a must have platform in my eyes.