What do options traders mean when they referred to an “implied move”? Let’s discuss that concept and then I’ll give an example of how to use it to your advantage. The term refers to the expected magnitude of a stock’s price movement. Technically it could also be referred to as the “mean deviation” as anticipated by the options market. We can look at this valuation at any time, but because stocks tend to move more around events such as earnings announcements, traders tend to focus more on those dates. This concept is crucial for traders because it helps them gauge market expectations and potential volatility. Here’s a breakdown of the key aspects of an implied move: The implied move is inferred from the pricing of options, particularly at-the-money options. It reflects the collective market sentiment about how much the stock price might change. A core component of the implied move is the implied volatility of the options. Implied volatility is an estimate of a stock’s future volatility and is embedded in an option’s price. Higher implied volatility typically indicates greater expected movement in the stock’s price. The implied move is often discussed in the context of upcoming events, such as earnings reports, product launches, or regulatory decisions. These events can cause significant price movements as new information becomes available. To calculate the implied move, traders often use the price of an at-the-money straddle (buying or selling both a call and a put with the same strike price and expiration). The total cost of the straddle can indicate the expected price move. For instance, if a straddle costs $5, the market is implying a move of $5 in either direction. Understanding the implied move helps traders in forming strategies. For example, if a trader believes that the actual move will be less than the implied move, they might sell options to capitalize on the potential decline in IV after the event. It also aids in risk management, allowing traders to set appropriate stop-loss levels and manage their positions according to the expected volatility. Foot Locker However, it is important to remember that an implied move is better thought of as the probability weighted average of how much options traders believe a stock could move, rather than how much it will move. Consider the following stocks, all of which have reported this week. As always, I’ve highlighted names we own. As we can see a few names with large implied moves, such as Foot Locker (FL) and UiPath (PATH) did experience big post-earnings price moves. A couple that were not expecting really big moves, such as Workday, moved nearly twice as much as the options markets anticipated – happily to the upside in this case, as it is a name we own. What causes large moves, such as the one seen in Foot Locker, and what are traders betting on now? FL YTD mountain Foot Locker in 2023 As the chart reveals, FL has had a tough go of it this year. Through last Friday it was down 38 percent year-to-date. The company had experienced four sequential quarters of flat or declining revenues and the most recently reported quarter saw EPS get more than cut in half from the same period a year earlier. The results reported this week saw more of the same. A nearly 9 percent sales decrease, EPS declined by 70 percent (non-GAAP), margins declined, it all looked pretty grim, yet the stock popped sharply. The news was expected to be bad, and it wasn’t quite as bad as expected. Add to that a relatively high short interest at 11.5 percent of the float, and a leveraged balance sheet and a sharp move higher on mediocre news becomes possible. Possibly short-covering, or possibly traders thinking the worst could be behind them, Foot Locker traded 6 times average call volume Wednesday, led by the January $30 strike calls. Is the worst behind it? Perhaps, and at least one institutional trader is willing to risk a little over 4% of the stock price hoping the company’s collaboration with the NBA could lead it out of the swoon it’s been in all year. DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
