Earnings Implied Move: What Options Prices Say About Volatility

Introduction

An earnings implied move shows how large a price swing the options market expects a stock could make around an earnings announcement. It is derived from option prices and gives a quick, market-based estimate of expected volatility for the event.

Knowing the implied move helps you set realistic expectations for how far a stock might travel after earnings. You can use it to size positions, set risk limits, and avoid surprises when a company reports. What will you learn here? You'll see how to calculate an implied move, what it represents, how to apply it to position sizing, and what pitfalls to avoid.

• Implied move approximates the market's expected absolute percentage swing around an earnings event.
• Calculate it quickly using the ATM straddle price divided by the stock price, using mid quotes for accuracy.
• It gives magnitude, not direction, and is best used to size positions and set realistic risk limits.
• Compare implied move to historical realized moves to judge whether expectations are elevated or muted.
• Common mistakes include using stale bid or ask prices, ignoring liquidity, and treating implied move as a guarantee.

What is an Implied Move?

The implied move is a short-hand number traders use to express how much the market expects a stock to move, usually around a specific event such as an earnings release. It comes from option prices that embed traders' expectations about future volatility.

Important point, the implied move measures expected magnitude, not direction. That means it tells you how big a swing the market expects, but not whether the stock will go up or down.

How option prices imply a move

Options reflect the market's estimate of future volatility. When an event like earnings approaches, option premiums often rise because uncertainty increases. Traders can extract a single, intuitive number from those option prices to describe the expected move, called the implied move.

Think of it as the market saying, "We expect the stock to move about X percent in either direction by the option's expiration." It is a market consensus, not a prediction that must happen.

How to Calculate the Earnings Implied Move

For beginners, use a simple and widely used method based on the at-the-money (ATM) straddle. The ATM straddle is the sum of the call and put premium at the strike closest to the stock price.

1. Find the ATM strike in the option chain that expires immediately after the earnings date. Weekly options are commonly used when available.
2. Record the mid price of the call and the mid price of the put at that strike. Use mid prices to avoid bid or ask distortions.
3. Add the two mid prices to get the straddle cost.
4. Divide the straddle cost by the stock price to get the implied percentage move.

Formula, expressed simply: Implied Move (%) = (ATM Straddle Price / Stock Price) × 100

Practical calculation example

Imagine $AAPL is trading at $180. The ATM call mid price is $3.00 and the ATM put mid price is $3.00 for options expiring after earnings. The straddle price is $3.00 + $3.00 = $6.00.

Implied Move = ($6.00 / $180) × 100 = 3.33%.

So the market expects $AAPL to move about 3.3% up or down around the earnings release by that option's expiration.

What Implied Move Really Means

Interpreting the number correctly is crucial. Implied move is an expected magnitude, which in statistical terms is often similar to a one standard deviation move. That means there's a roughly 68% chance the move will fall within that range if returns were perfectly normally distributed and the market's estimate was spot on.

But stock returns are not perfectly normal, and earnings can produce gap moves that exceed expectations. Always remember implied move is a market consensus based on current prices, and it's an expectation not a promise.

Compare implied vs realized moves

One practical step is to compare the implied move to recent realized moves for the same event. Calculate the absolute percentage change from close to next-day close for the last several earnings dates and average them. If implied move is much higher than realized, the market is pricing extra uncertainty. If it's lower, history suggests more risk than the market expects.

Using Implied Move to Size Positions

You can use the implied move to set realistic expectations for how much a position might gain or lose around earnings. This helps you choose a position size that keeps potential losses within your risk tolerance.

1. Decide your maximum acceptable dollar risk for the trade or for your portfolio on that position. Many investors use a percent of portfolio, such as 1% to 2%.
2. Compute the implied dollar swing per share. Multiply the stock price by the implied move percentage.
3. Calculate how many shares would expose you to that acceptable risk if the stock moved by the implied amount.

Position sizing example

Suppose your portfolio is $50,000 and you want to risk no more than 2% on this position into earnings. That means your maximum dollar risk is $1,000. You look at $TSLA trading at $200 and the market's implied move is 5%.

Implied dollar move per share = $200 × 5% = $10. If the stock moves by that amount, each share changes by $10.

To limit your loss to $1,000 if the stock moves by the implied amount, you would hold at most $1,000 / $10 = 100 shares. This prevents an expected-move-sized swing from exceeding your risk tolerance.

Note, this calculation is a guide. You might choose fewer shares if you want room for worse-than-expected moves, or more conservative sizing if you plan to use protective orders.

Practical Tips When Using Implied Move

Follow these best practices to make implied move estimates useful and reliable for your planning.

• Use the mid price of bid and ask to avoid one-sided quotes. Bid or ask alone can overstate or understate the straddle cost.
• Choose the option expiration immediately after the earnings date, not far out. The closest expiry reflects the event-specific premium.
• Check liquidity. Wide bid-ask spreads on the options mean the straddle price is less reliable.
• Compare implied move to historical realized moves. That gives context on whether the market is pricing in more or less uncertainty than history suggests.
• Remember implied move is about magnitude, not direction. Do not treat it as a directional forecast.

Real-World Examples

These examples show how implied move works in practice. Numbers are simplified to keep the focus on the method and how to use the result.

Example 1: $AAPL scenario

You check the option chain for $AAPL before earnings. Stock price $180. ATM call mid $3.00 and ATM put mid $3.00. Straddle = $6. Implied move = 3.33% or about $6 per share. If you hold 100 shares, the expected swing is about $600. If your portfolio risk limit for the position is $500, you would reduce shares to 83 or fewer to stay inside that limit.

Example 2: Comparing implied to realized

Look at $NFLX after four recent earnings. Realized absolute moves were 4.0%, 6.5%, 3.2%, and 8.1%, averaging 5.45%. If current implied move is 7.0%, the market expects more volatility than the recent average. That could be because of a new catalyst or uncertainty around guidance.

Limitations and What Implied Move Doesn’t Tell You

Implied move is a useful planning tool, but it has important limitations you must keep in mind.

• It does not predict direction. Stocks can move up or down by the implied amount, or much more in either direction.
• It is influenced by volatility premium. Option prices can include risk premia that inflate the implied move, especially if many traders buy protection.
• Low liquidity or wide bid-ask spreads make the estimate noisy and unreliable.
• Market-implied numbers assume the options market is efficient. In practice, unexpected news, guidance, or external events can lead to much larger gaps.

Common Mistakes to Avoid

1. Using bid or ask instead of mid prices. That misstates the straddle cost and can overstate the expected move. Always use mid quotes when possible.
2. Treating implied move as exact. It is an expectation, not a guaranteed range. Allow for bigger moves than implied, especially for small-cap names or when news could surprise the market.
3. Ignoring liquidity and spreads. Thinly traded options can show misleading implied moves. Check volume and open interest before trusting the number.
4. Confusing implied move with probability. A 5% implied move is not the probability the stock will move 5%. It is the expected magnitude of the move, usually representing one standard deviation type thinking.
5. Sizing as if the implied move is a maximum. You should size positions assuming moves can exceed the implied number, and plan for tail risk accordingly.

FAQ

Q: What exactly does the implied move represent?

A: The implied move is the market's estimate of the absolute percentage swing a stock might make during a short window, commonly around earnings. It captures expected magnitude, not direction, and is derived from option premiums.

Q: Which options do I use to find the implied move?

A: Use the at-the-money call and put on the option expiration that occurs immediately after the earnings release. Use the mid price between bid and ask for each option to calculate the straddle cost.

Q: How can I use implied move to size my position?

A: Decide your maximum acceptable dollar risk for the position. Multiply stock price by implied move percent to get expected dollar swing per share. Divide your acceptable dollar risk by that swing to find how many shares fit your limit.

Q: Can the implied move be wrong?

A: Yes. Implied move is a market estimate and can be too high or too low. Realized moves can and do exceed the implied number, especially when unexpected news or guidance appears.

Bottom Line

Implied move gives you a straightforward way to see how much the market expects a stock to swing around earnings. It is calculated simply from ATM option premiums and tells you expected magnitude, not direction.

You can use the implied move to size positions and set realistic risk limits. Use mid prices, check liquidity, and compare implied numbers to historical moves before relying on them. At the end of the day, it's a planning tool that helps you avoid surprises, but not a crystal ball.

Next steps: practice extracting implied moves from option chains for a few stocks you follow. Compare them to recent realized earnings moves and apply the position-sizing example to see how it affects the number of shares you would hold.