Cboe Expected Move Calculation Using at-The-Money Straddle

What is the Expected Move?

The expected move in options trading refers to the anticipated price change of the underlying asset based on the current options market conditions. For an at-the-money straddle, this calculation helps traders estimate the potential price movement of the underlying asset when both call and put options are purchased at the same strike price.

The expected move is typically expressed as a percentage and provides insight into the market's implied volatility and the potential for price movement in either direction.

At-The-Money Straddle

An at-the-money straddle is a trading strategy that involves purchasing both a call option and a put option on the same underlying asset at the same strike price, which is currently at or near the current market price of the asset.

This strategy is used when a trader expects significant price movement in either direction but is uncertain about the direction. The at-the-money straddle is particularly useful in volatile markets where the trader believes the asset has equal probability of moving up or down.

Calculation Method

The expected move calculation for an at-the-money straddle on the CBOE options market involves several key components. The primary formula used is:

Where:

• Call Premium - The price paid for the call option
• Put Premium - The price paid for the put option
• Underlying Price - The current market price of the underlying asset

The result is typically expressed as a percentage, representing the expected price movement of the underlying asset based on the straddle's cost.

Step-by-Step Calculation

1. Determine the current market price of the underlying asset
2. Identify the strike price for the at-the-money straddle (typically the current market price)
3. Find the current bid/ask prices for both the call and put options at the at-the-money strike price
4. Calculate the total cost of the straddle by adding the call premium and put premium
5. Divide the total cost by twice the underlying price to get the expected move percentage

Example Calculation

Let's walk through a practical example to illustrate how to calculate the expected move using an at-the-money straddle.

Scenario

We're analyzing the XYZ stock, which is currently trading at $50. We want to calculate the expected move using an at-the-money straddle.

Step 1: Identify the Underlying Price

The current market price of XYZ stock is $50.

Step 2: Determine the Strike Price

For an at-the-money straddle, the strike price is equal to the current market price, so we'll use $50.

Step 3: Find Option Prices

From the CBOE options market data, we find:

• Call option at $50 strike: Bid $2.50, Ask $2.75
• Put option at $50 strike: Bid $2.25, Ask $2.50

For this example, we'll use the midpoint between bid and ask prices:

• Call premium: ($2.50 + $2.75) / 2 = $2.625
• Put premium: ($2.25 + $2.50) / 2 = $2.375

Step 4: Calculate Total Cost

Total cost of the straddle = Call premium + Put premium = $2.625 + $2.375 = $5.00

Step 5: Compute Expected Move

Expected Move = (Call Premium + Put Premium) / (Underlying Price × 2) = $5.00 / ($50 × 2) = $5.00 / $100 = 5%

Therefore, the expected move using this at-the-money straddle is 5%.

Interpretation

The expected move calculation provides several insights for traders using an at-the-money straddle:

• Market Volatility: A higher expected move percentage indicates higher implied volatility in the market
• Trading Strategy: Helps determine if the straddle is appropriately priced for the expected price movement
• Risk Assessment: Provides a rough estimate of the potential price movement that would make the straddle profitable

Traders should consider the expected move in conjunction with other factors such as time decay, interest rates, and dividend yields when evaluating the straddle's potential profitability.