The expected move: what the straddle price is actually telling you
The at-the-money straddle gives you the market's priced range for an underlying over a defined period, in one number, with no model assumptions beyond the price itself. Here is how to compute it, how to read it, and the four ways it gets misused.
Of all the numbers derived from an option chain, the expected move is the most directly useful and the easiest to compute. It is also the one most often described as a prediction, which it is not.
The computation
Take the strike nearest the current price. Add the call price and the put price at that strike. That sum is the at-the-money straddle, and it is the expected move in dollars.
`` expected move ($) = ATM call + ATM put expected move (%) = (ATM call + ATM put) / spot x 100 ``
That is the whole calculation. No volatility input, no model, no assumptions beyond the two prices you can read directly off the chain.
The intuition is clean. The straddle pays out the absolute distance price travels from the strike by expiry. Its market price is therefore what participants collectively charge for that payoff, which is a priced estimate of how far the underlying will move, in either direction, over that period.
What the number means
The straddle approximates a one standard deviation move over the life of that expiry. Loosely, the underlying finishes inside that range roughly 68% of the time and outside it roughly 32%.
Two refinements worth knowing.
The straddle slightly overstates a true one-standard-deviation move. A common adjustment multiplies by about 0.8 for a tighter estimate. The unadjusted straddle is the widespread convention and is fine as long as you know it runs a little wide.
The range is symmetric by construction, and the actual distribution is not. Equity returns have a fatter left tail, which is the same fact that produces volatility skew. A symmetric band around spot is a convenient summary of an asymmetric distribution.
Where it is genuinely useful
Sizing expectations before an event. If a stock's earnings expected move is 6% and you are building a view that depends on a 3% move, the market has already priced more movement than your thesis needs. That is worth knowing before you put the trade on, not after.
Comparing the priced move against history. A 6% priced move on a name that has averaged 4% on its last eight reports is a different proposition to a 6% priced move on a name that routinely does 9%. This comparison is one of the few in options analysis where both sides of the comparison are directly observable.
Setting bounds that the market agrees with. A target beyond the expected move is a target the option market considers unlikely on that horizon. It might still be the right target, but you should know you are betting against the priced distribution rather than with it.
Four ways it gets misused
Treating it as a forecast. It is a price. It is the market's collective charge for a payoff, subject to supply, demand and hedging needs, exactly like implied volatility. A large expected move means optionality across that period is expensive. It does not mean a large move is coming.
Reading it as a boundary. Roughly one time in three the underlying finishes outside the range, and that is the design, not a failure. Treating the expected move as a wall produces the same error as treating a gamma wall as a ceiling.
Ignoring the period it covers. An expected move is always attached to a specific expiry. A weekly and a monthly expected move on the same symbol are different numbers describing different windows, and quoting one without its horizon makes it meaningless.
Pricing it off a dead chain. This one is subtle and it is the most damaging. An expected move computed from an expiry that has already settled reads absurdly small, because the contracts no longer carry time value. The number that comes out is a real number, it passes any plausible sanity range, and it is describing nothing. A range check cannot catch this. Only a liveness check can: confirm the expiry you are pricing has not yet settled before you trust anything derived from it.
A cheap way to sanity-check one
Expected move percentages should agree across instruments tracking the same thing. If one product is one tenth the size of another on the same index, their expected moves in dollars differ by a factor of ten and their percentages should match closely. If they do not, one of the two chains is stale, illiquid or mispriced, and you have learned that for free.
Two independent sources agreeing to a fraction of a percent is meaningful evidence. One source looking plausible is not evidence at all, which is the general shape of most measurement errors worth catching.
The summary
The expected move is the option market's priced range for a defined period,
read directly off two contract prices. It is the cleanest single number in
options analysis, and it is a price rather than a prediction.
Used to calibrate what you are betting on against what is already priced, it is excellent. Used as a forecast of where price will be, it is being asked for something no straddle contains.
Next: the variance risk premium, which is what happens when you consistently take the other side of these prices.