How to Calculate the Expected Move for Earnings: Pricing In or Overpriced?
Summary
The expected move tells you how much the options market thinks a stock will move after an earnings report. It's derived from the at-the-money straddle price and represents one standard deviation of expected movement. If the actual earnings move is smaller than the expected move, options sellers profit. If larger, buyers profit. Historically, the expected move overestimates the actual move about 70% of the time, creating a structural edge for premium sellers during earnings season.
Key Takeaways
Calculate the expected move by taking the ATM straddle price at the nearest post-earnings expiration. For weekly options, the straddle price approximates the expected one-standard-deviation move. Compare this to the stock's average actual earnings move over the past 8-12 quarters. If the expected move exceeds the historical average by 20%+, options are overpriced and selling premium is favorable. If the expected move is below the historical average, options are underpriced and buying is favorable.
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NVDA reports earnings after the bell. The stock is at $130. The weekly ATM straddle (buy the $130 call and $130 put expiring in 2 days) costs $12.00. This means the market expects NVDA to move approximately $12 (9.2%) in either direction by expiration.
NVDA's average actual earnings move over the past 8 quarters is $8.50 (6.5%). The options market is pricing in a 40% larger move than history suggests. Is this an opportunity?
Calculating the Expected Move
Method 1: ATM Straddle Price
The simplest method:
Expected Move = ATM Straddle Price
Look at the options expiration closest to (but after) the earnings date. Add the ATM call and ATM put prices.
Example: AAPL at $245, earnings Thursday after close, Friday expiration.
This means the market expects AAPL to close between $236.50 and $253.50 by Friday, with ~68% probability (one standard deviation).
Method 2: Straddle Adjusted for DTE
For expirations further from the earnings date, isolate the earnings component:
Earnings Move = sqrt(DTE_post_earnings / DTE_pre_earnings) x Straddle Adjustment
This is more complex and typically not needed if weekly options are available.
Method 3: Implied Volatility to Price
Expected Move = Stock Price x IV x sqrt(DTE/365)
Example: Stock at $100, IV at 80%, 2 DTE. Expected Move = $100 x 0.80 x sqrt(2/365) = $100 x 0.80 x 0.074 = $5.92
Comparing Expected vs Historical Moves
Build a table for each stock you trade during earnings:
AAPL Last 8 Earnings:
Result: Options overpriced in 6/8 quarters (75%). Average expected move: 3.85%. Average actual move: 3.19%. The premium seller's edge: 0.66% per earnings event.
Earnings Strategies Based on Expected Move Analysis
When Expected Move > Historical Average (Most Common)
Strategy: Sell premium. Iron condors, short strangles, or short iron butterflies centered at the current price.
Short iron condor example:
Why it works: The options are priced for a larger move than likely occurs. When the actual move is smaller, all four legs decay rapidly, and you keep most of the premium.
When Expected Move < Historical Average (Less Common)
Strategy: Buy premium. Long straddles or strangles.
Long straddle example:
Why it works: The options are priced for a smaller move than likely occurs. When the actual move is larger, one leg of the straddle gains more than both legs cost.
When Expected Move ≈ Historical Average
Strategy: No trade. The options are fairly priced, and there's no structural edge for buyers or sellers.
IV Crush: The Post-Earnings Reality
Regardless of which direction the stock moves, implied volatility drops dramatically after earnings (IV crush). This affects all options:
Long options: Even if the stock moves in your favor, the IV crush can offset your directional gains. A 3% stock move with a 40% IV crush can result in a breakeven or losing long option.
Short options: IV crush is your friend. Even if the stock moves against you by the expected amount, the IV crush offsets much of the loss.
This is why selling premium is structurally advantaged around earnings: you benefit from both a smaller-than-expected move AND the IV crush. The buyer needs to overcome both.
Practical Workflow for Earnings Season
OptionsPilot's backtester includes earnings-specific analysis showing historical expected vs actual moves for popular options stocks, giving you the data needed to identify overpriced earnings premium.