Somebody’s going to call the expected move a mythical beast.
It isn’t. And when I say magical mythical beast, I’m specifically and directly taking shots at stuff like Fibonaccis. I got your Fibonaccis right here, big guy.
The expected move is arithmetic.
It’s an averaging model of option pricing, run off implied volatility, that spits out what the options market thinks a product moves over a given stretch.
Right now the weekly number on the SPX is 97 and change. I round it to 100.
Somebody in my room told me you can’t round 97 to 100. I can, and I will, and I just did.
Why That Line Matters
Almost nobody gets this next part, and it has nothing to do with the line being pretty.
When price crosses outside that expected move, it forces people to trade.
Most trading firms are short options, because most retail buys options. You’ve got twenty or thirty million people around the world trading US options and the overwhelming majority of them are paying premium, not collecting it.
So when the market cracks through the bottom of the expected move, every one of those firms is suddenly carrying directional risk they never wanted.
They don’t sit around thinking about it. Servers kick in, they hedge, and hedging means selling into it.
Which is how a level nobody drew on a chart produces a violent move. The level isn’t doing anything at all. A few hundred desks are being obligated at the same price at the same moment.
The Rule Nobody Tells You
The weekly expected move always supersedes the daily expected move, and I don’t care what the daily number says.
If the daily implied move is 43 bucks and we’ve already blown through the weekly, that 43 means almost nothing to me. We’re outside the bigger number, and the bigger number is the one with the hedging behind it.
And know what it measures, because this trips people up. It reads the probability of expiring within that range, which is a completely different animal from the probability of touching it.
Plenty of days adhere to it beautifully. Then you get a day where we’re outside the weekly by a wide margin and the whole thing goes no holds barred.
What To Do With It Tomorrow
Mark the weekly expected move on whatever you trade. Top and bottom, drawn from Monday’s open.
Then watch what happens when price approaches either edge.
If we’re inside it, most days behave. If we crack outside it you’re in a different regime, because now the selling is obligation instead of opinion, and obligation doesn’t stop to consider whether the price is fair.
There’s your edge on a day like today. I don’t know where this market’s going and neither does anybody else. I know who’s forced to do what once it gets there.
If you want to dig deeper into this, I wrote a guide on how I use the expected move to construct trades.
To your success,
Don Kaufman
