Expected Move vs Short Straddle
📊 Expected Move vs Short Straddle
| Feature | Expected Move (EM) | Short Straddle (SS) |
|---|---|---|
| Definition | A statistical forecast of how much the underlying is expected to move (up or down) by option expiration, based on implied volatility. | An options strategy: sell 1 ATM call + sell 1 ATM put at the same strike and expiration. |
| Formula / Estimation | Approx. 1 SD move ≈ ATM Straddle Premium × 0.85 (rule of thumb) OR use IV-based formula: EM=Stock Price×IV×DTE365\text{EM} = \text{Stock Price} \times \text{IV} \times \sqrt{\tfrac{\text{DTE}}{365}}EM=Stock Price×IV×365DTE | Premium collected = ATM Call Premium + ATM Put Premium. This total premium ≈ EM (but not identical). |
| Interpretation | Range where the market is pricing ~68% probability the underlying will expire within (statistical). | Breakeven range for profitability = Strike ± Collected Premium. |
| Risk Profile | No position — just a metric. | Unlimited loss potential (if move > collected premium). |
| Profit Potential | None, it’s only an estimate. | Max profit = Collected Premium (if underlying closes at strike). |
| Use Case | Helps traders gauge market expectations, set strike widths, or compare IV levels. | Income strategy betting the underlying stays within expected range (low realized volatility). |
| Relation to Each Other | EM is often derived from straddle pricing (premium contains IV info). | SS payoff structure naturally reflects EM: the total premium collected defines the expected no-loss range. |
✅ Key Insight:
- Expected Move is a calculation (a forecasted volatility-based range).
- Short Straddle is a trade (a bet the underlying will stay inside that range).
- The premium from a short straddle ≈ expected move, but one is a theoretical estimate while the other is an actual trade exposure.
