TransWikia.com

Expected stock price move using IV

Personal Finance & Money Asked by 4thSpace on December 29, 2020

From this post https://www.projectoption.com/expected-move-explained/, he uses the following formula to calculate a 1 SD move in the stock:

Expected Move Formula

How do you know which stock option to use for this?

For example, if I want to calculate the expected move in SPX for Feb expiration, what do I use?

SPX is at 2616. Do I use puts or calls?

If puts, should it be 2615 OTM or 2620 ITM? Same question if with calls.

For strikes that are next to each other, it probably doesn’t matter which I use, since IVs will be very close. At least for SPX. There could be a bigger difference in IVs for other stocks.

Can someone provide a completed calculation?

One Answer

Brokers and web sites offer various IV numbers:

  • the IV of each option
  • an average IV per expiration
  • an average IV for the stock (all options)

Options of the same expiration can have very different values and the values from that expiration can be very different from other expirations.

A volatility smile is when the IV of each option is higher as the option gets further in and out-of-the money. There are also option smirks (IV has either a forward or reverse skew).

They calculate the average implied volatility in different ways. Some just average all of the different IVs. A noted option author weights each individual option's implied volatility by its trading volume and its distance in- or out-of-the-money (at-the- money options receive the most weight). Because of the volatility smile/smirk, IVolatility uses a proprietary weighting of the delta and vega of 4 ATM options per expiration. If you really want a headache, read about the calculation of the CBOE Volatility Index (VIX).

I'd suggest that you use the average implied volatility for an expiration as the input for your formula. I don't know if which method of calculation is most effective though I surmise that it doesn't make much difference because it's just an estimate which changes daily as IV changes.

Answered by Bob Baerker on December 29, 2020

Add your own answers!

Ask a Question

Get help from others!

© 2024 TransWikia.com. All rights reserved. Sites we Love: PCI Database, UKBizDB, Menu Kuliner, Sharing RPP