Calculation and mechanics
From Implied Volatility, the expected move follows the square-root-of-time rule: the annualised volatility is multiplied by the square root of the share of the year that the period under review covers. At a price of 100 USD and an IV of 25%, the expected move over 30 calendar days is about 7.2%, so roughly 92.8 to 107.2 USD.
An alternative approximation can be derived directly from option prices. The price of an at-the-money straddle reflects the absolute move the option market prices in until expiry. This straddle move is not identical with one standard deviation: under simplifying assumptions, the expected absolute move with normally distributed returns is around 80% of one standard deviation. This approach uses current option prices instead of the IV formula but remains an approximation as well.
EM = price x IV x sqrt(days / 365)
Distinction
One standard deviation is not a price boundary. Under the normal distribution assumption, around 32% of outcomes fall outside the range of plus or minus one standard deviation. Actual returns can also deviate from this model assumption and in particular show larger swings.
The IV Term Structure shows that implied volatility can differ by expiry. An expected move over 90 days can therefore be based on a different IV than one over 30 days. The SKEW Index additionally shows how the option market prices asymmetric tail risk for the S&P 500.
Related terms
- Implied Volatility (IV)
- At-the-Money Straddle (ATM straddle)
- IV Term Structure (Volatility Term Structure)
- SKEW Index (CBOE SKEW, tail risk index)
- DTE (Days to Expiry)
All market and analytical information is provided for educational and analytical purposes only and does not constitute investment advice or a trading recommendation.