What the Options Market Prices: Implied Volatility and the Expected Move

A company reports earnings tonight. How much will the stock move tomorrow? Nobody knows, but the market has already put a price on the question: that price is inside the options. This article explains how to read it; it doesn't recommend trading options. For the basic structure of a premium, read Options first.

The Expected Move in One Division

The price of the ATM straddle gives, in dollars, the size of the move the market expects through expiry. Divide by the stock price and it becomes a percentage:

Expected move ≈ ATM straddle price ÷ stock price

This is the most useful yardstick for reading earnings reactions: a 6% move is a big surprise in a stock priced for 3%, and a quiet night in one priced for 12%. More: How to Read an Earnings Day

From Implied Volatility to the Same Number

The second route is to scale annual implied volatility to the expiry. Volatility grows with the square root of time:

One standard deviation move ≈ price × IV × √(days ÷ 365)

The two methods don't give the same number, and that isn't an error. The ATM straddle corresponds to about 0.8 of a one standard deviation move, because the straddle prices the average absolute move, not the standard deviation. In practice the straddle method is more direct: it's computed from prices that actually trade.

The same logic works at the index level. The VIX is the 30-day implied volatility derived from S&P 500 options. A VIX of 20 means the market is pricing a one standard deviation move of about 20 ÷ √12 ≈ ±5.8% in the S&P 500 over the next month. More: What Is Volatility?

What to Watch When Reading It

• The expiry must cover the event. To measure an earnings move, use the first expiry after the announcement. A longer expiry also includes the volatility of days outside the event.
• Use the mid price. Option bid-ask spreads can be wide; the midpoint between bid and ask gives a more reliable reading than the last trade.
• No exact ATM? Use the nearest. If the stock is at $203, look at both the $200 and $205 strikes.
• There's no direction. The straddle prices the size of the move, not its direction. If the market leans one way, it shows in the relative price of puts and calls (the skew), not in the expected move number.

Where You'll See It on This Site

There's no options chain on this site. The VIX, the ready-made version of the same measure for the market as a whole, is on the Markets screen. Earnings dates are on the Earnings screen, and the move after a report on the stock page.