Stop Guessing Earnings Moves - Do This Instead

Key Concepts

• Expected Move: The anticipated price fluctuation of an underlying asset over a specific timeframe, particularly relevant during earnings season.
• At-the-Money (ATM) Straddle: An options strategy involving simultaneously buying a call and a put option with the same strike price and expiration date. The strike price is at or near the current market price of the underlying asset.
• Croup (likely a typo for "Group” or a platform/tool name): A platform or tool providing pre-calculated expected move data.
• Volatility: Implied volatility reflected in option prices, used to estimate potential price swings.

Calculating Expected Move – A Quick Method

The primary focus of this explanation is a rapid method for calculating the expected price movement of an underlying asset, particularly useful leading up to earnings announcements. The speaker highlights two approaches: utilizing a pre-calculated value from a platform ("Croup") and a manual calculation based on the at-the-money (ATM) straddle price.

The easiest method involves accessing pre-calculated expected move data directly within a platform, identified as "Croup." This platform displays the expected move for various timeframes – 3 days, 10 days, and 339 days – conveniently located within parentheses on the right-hand side of the display.

Manual Calculation Using At-the-Money Straddle

For those preferring a manual calculation, the speaker details a straightforward formula. This method leverages the price of an at-the-money (ATM) straddle. An ATM straddle consists of buying both a call option and a put option with the same strike price and expiration date, where the strike price closely matches the current market price of the underlying asset.

The calculation involves dividing the ATM straddle price by 0.85. As an example, if the ATM straddle is trading at $535, the calculation would be $535 / 0.85 = $4.81. This result represents the estimated expected move in the underlying asset’s price.

Practical Application & Market Context

The speaker acknowledges that market conditions (markets being “a little bit wide” due to closure) can affect the precision of the calculation. However, the core principle remains valid. The example provided demonstrates a direct application of the formula, yielding a specific expected move value of $4.81. This information is particularly valuable for traders preparing for the volatility associated with earnings season.

Supporting Evidence & Rationale

The rationale behind using 85% of the ATM straddle price is not explicitly stated, but it implies that the ATM straddle price incorporates a premium reflecting market expectations of volatility. Reducing this price by 15% (taking 85%) likely aims to provide a more conservative and realistic estimate of the actual expected move.

Synthesis

The key takeaway is a practical and efficient method for estimating the expected price movement of an underlying asset, especially crucial during earnings season. Traders can either utilize pre-calculated data from platforms like "Croup" or perform a quick manual calculation using the price of an at-the-money straddle, dividing it by 0.85. This provides a valuable tool for risk management and trade planning.