Expected Move

Before we get too deep into the “Weekly Expected Move” - I think we should discuss what “expected move” is and why we should use it. All markets - have a personal rhythm to their movement. $AAPL moves differently than $AMD and $TLT bonds move differently than $GOLD. Every market - has a unique rhythm and it has a “statistical expectation of movement.”

Don’t get too hung up on the math; that is not the important part. The main thing is this: due to the data provided by options we can determine how far a market “should move” within a given period of time if it continues to move “normally” … and that is what we call the “expected move” of a market.

Generally speaking - traders look at the one standard deviation (1-SD) which gives them the range price should close in “70% of the time.” So if I have a 7-day expected move - then it’s a 7 day range a stock should close within - 70% of the time… or said another way… we have a 70% chance of closing within the range.

The data used to calculate the expected move is: TIME, VOLATILITY, PRICE. If we use a 5-day expected move - it will change the outcome. If we get a change to the implied volatility - it will change the outcome.

There are a LOT of places to learn more about expected move and options - so I won’t spend too much time on this concept here today. Here are some links to get more insight into what “expected move” is

Tasty Live

Schwab (TOS)

White numbers on the right side - this is the "average implied volatility" shown as percent % and then a +/- expected move.

Any market that has options has an “average implied volatility” and an expected move for a certain timeframe. Brokers who offer options trading generally have this “Average IV” shown in the options chain. In the picture above - the white numbers on the right side in % is the average IV for that expiration.

At any time - a trader can come into the options chain and see the average IV and the expected move for the date shown. So - in the picture below I have marked out the “next Friday’s” date (September 6th). I took this picture on a Saturday - and this is a long weekend (September 2nd is a holiday). Because the market will be closed on Monday the 2nd, there are only 4 trading days next week.

What we have above - is the “dynamic” expected move. This number will continue to change as time goes on and as volatility changes. Each day we will be closer and closer to Friday and that number will shrink until the close on Friday.

An Expected Move can be useful for traders of all types - intraday traders, swing traders- options traders, futures traders, stock traders… but it’s an ever-changing number that shifts constantly. While it has a lot of value - what we want to do is get a “static” expected move. We want to capture a value - a number - and use that through the entire timeframe.

Looking at the picture above - suppose it was Friday afternoon at 2PM market time and we have 2 hours before the market closes. We are interested in next weeks movements - the expected move for next week. We can see in the picture that SEP6 expiry has 76.00 higher or lower and we can use that with the current stock price $5648.40. We would subtract 76 from 5648.40 and we would add 76 to 5648.40 to define our expected move for the next week.

The Expected Move will change once the futures markets open Sunday night - so if you are manually getting the expected move each week you will want to get that number after 4:15PM Friday and before Sunday 2PM.

Why? Because we want to see what the projection is for the next week - before changes come. There are billions of dollars traded on the expectations of next week’s price movement - so we want to know what that movement was - when all that money was traded.

Once the new week begins - these funds and firms will hedge their options trades based on these expected move levels and price - if we get above / below the weeks expected move range. So - we want the “locked” or the static expected move… not the one which continues to count down to expiration.

Manually collecting the numbers and drawing the lines on one market is not really a big deal - but what if you are looking at a whole list of stocks each day? You would not want to spend the weekend drawing out all these levels and updating them on the charts each week… so an indicator was made to do this for us.

Issues with the Expected Move Indicator

As with most custom studies - there are a few details that we need to discuss; the number one thing is that TOS Coding does not give us access to the options average implied volatility (those white numbers on the right side). This indicator gets an answer that is close to the same thing - but it’s not the same thing.

Also - the indicator has issues with “short trading weeks” - so if there is a short trading week we can expect to see the expected move act a little odd. This is how it is - and there is really no way around it. The take-away - is to recognize that errors can be made and that it’s best to look at the options chain to get a sense of the IV for the coming week.

Weekly Expected Move (Locked)

One indicator I use frequently is the Weekly Expected Move indicator – this particular one is “locked” and shows what the next week expected move will be. I did not code this indicator

Bias

This indicator was developed for the S&P Index but is often used for other markets – the important thing to understand about using this measurement comes from the fact that this expected move is not dynamic – it will not update as volatility changes.

Typically, expected move indicators update as volatility changes – presenting a new measurement of expected move and giving traders a glimpse of how far a market could travel within an expected time period.

Utility

So – How do we use an indicator like this? At the OEC, I have developed nearly two dozen strategies for the Weekly Expected Move indicator for options and futures trading. Once placed on the chart, It is recommended that you only use it on the daily. The TOS coding does not correctly display the lines on intraday charts and will give an incorrect expected move projection.

This indicator can be used to identify a weekly increase in the expected move – just look at the previous week and look at the current week – if the current week is bigger, the market makers have increased the volatility. If the current Weekly Expected Move is smaller, the market makers have decreased the implied volatility.

I measured two different weeks in the picture

Futures Trading

When trading the Futures Indexes, it is advised to watch price action as it nears these lines; as a pivot point – these marked levels become a place of high volatility and very often price will either reject here or “pin” here. Understanding how far a market has moved in a week often comes to having a perspective on how far it was expected to move within the week.

Options Trading

When trading options – these weekly lines present us with a variety of trading signals; from contrary trade triggers to mechanical trade logic, these Weekly Expected Move lines give us the opportunity to trade verticals, iron condors, butterfly’s and so much more.

The accuracy of the trading strategies is constantly changing, but we can always determine an expectation of the current accuracy for each market we want to trade & for each product we want to trade.

This is an important distinction when we are trading mechanical strategies, because the accuracy of the strategies changes when we are trading something like $CAT or something like $SPX.

Strategies

The strategies I have developed for trading the Weekly Expected Move are taught to the coaching clients at the OEC Coaching service; if you are interested in learning to trade using this indicator - please reach out.

Here is the indicator:

TOS Share Link: http://tos.mx/Dybfwch

Interested in more indicators? Join the OEC Coaching TOS Workbook Discord Group! This is a massive database of TOS indicators collected from around the web! Some are indicators I have made - others are indicators that I have found for free. All attribution is given when possible.

TOS WORKBOOK DISCORD: https://discord.gg/yQp2TKX4xJ

Please note: The TOS WorkBook is a collection of studies - things I have found that are supposed to be free and open source. If you are the owner of one of these indicators and it was not supposed to be found for free - or you no longer want it to be free - please reach out to me. I will remove it.

Weekly Expected Move