During the earnings season, the stock market usually has large volatility, which may provide potential trading opportunities for traders.

But how can we know how much a stock has gone up or down after the earnings report?

Investors or traders can use a tool called “expected volatility” to forecast their earnings.

What is Expected Volatility

Expected move refers to the future rise and fall of the stock based on the current option price.

By understanding expected volatility, investors or traders can spy on the price changes in the options market for a particular stock or ETF over a period of time.

This can help traders identify potential trading opportunities and manage risks, especially on major events such as financial statements, macroeconomic indicators, or FDA announcements.

How to Calculate Expected Volatility

The easiest way to calculate expected fluctuations is to multiply the price of a trans option portfolio by 85%. [1]

The trans portfolio is designed to profit from the increase in implied volatility by purchasing both call and put options with the same strike price and expiry date.

Thus, the size of implied volatility can be snooped at the price of the crossover options portfolio.

Simply put, to calculate the expected volatility of a stock during the earnings week, try the following steps:

• Choose the first option expiration date after the company publishes the earnings report.

• Find an option chain and add the price of a bargain call option to the price of an affordable put option to get the price of a trans combination.

• Then multiply that value by 85% to get the expected volatility, the magnitude of the stock that could fluctuate. You can also divide the result by the current price of the stock to get the percentage of the stock's expected fluctuation.

But it is worth noting that calculating expected volatility is only the expected range of stock price movements, and the direction is uncertain. That is, the share price may rise or fall.

[1] Source: Options AI Support

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Let's take a look at an example of using a flat straddling combination to calculate expected fluctuations.

Assuming Apple's current stock price is $135, the company will release the report 2 days later, i.e. February 2, and the first option expiration date after Apple reports is February 3.

Suppose at this expiry date, a call option with a strike price of $135 is about $4.5, while a put option with a strike price of $135 is $4.1.

Add up the two to get the trans options portfolio price of $8.6. Then multiply 8.6 by 85%, you can get $7.31, which is expected fluctuation.

This indicates that the options market expects Apple shares to rise or fall by $7.31 from now until February 3.

This is equivalent to about 5.4% ($7.31 USD/135) of the rise or fall.

It is worth noting that the market is always changing, and the expected volatility does not mean that the stock price will rise so much or fall so much in the future.

What is useful for investors

For ordinary traders, fluctuations are expected to be used in the following areas.

• If you are holding a floating stock, calculating expected fluctuations can help you decide whether to sell or keep holding before your earnings.

• Calculating expected volatility helps you lay out ahead of major events (such as earnings reports, macro data releases, FDA announcements), manage risk and hedge your portfolio.