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The Expected Range for February

On my latest stocktwits brunch, I pulled up a spreadsheet that listed the current market volatility readings over several asset classes. These readings can then be reverse engineered to show what sort of expected move we may see within the next month. I feel that this is a very useful refresher going into a new month or opex cycle as it gives you a feel for what investors are expecting.

Do note that these levels are not set in stone, and there is a little voodoo behind it. First, the implied volatility readings are based on some calculations relating to the supply and demand of options-- the perceived risk of future movement is seen through option premiums, and we work backwards from there to get our readings.

The calculation is relatively simple. You divide the reading by the square root of 12 (12 months in a year) to get your percentage-- you then divide that percentage in half to get the expected move up/down-- that's from a normal distribution perspective.

You then take that percentage and add/subtract it from the current price of the underlying-- and that gives you the expected range for the month of Febrary. If you think that the range is going to be large, you should be buying volatility, and selling vol if your perception of risk is less than what the current market is telling you.

This is a statistic, and volatility measures are related to the standard deviation of price changes-- so these levels are right about 2/3 of the time.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/