Expected Move: Stop Guessing Trades — Full Breakdown & Transcript

[00:01] the best ways you can help us out by liking the video or subscribing to the channel either one of those guys really helps us out a lot. So in the world of the financial markets in the pot of jambalaya that is the randomness and

[00:16] unpredictability of the stock market here's a little secret. Nobody knows what's going to happen next. Not you, not me, not anybody. So it might seem like day-to-day how am I going to pick direction? Like day-to-day how am I

[00:32] going to pick a strategy because I don't know where the market is going to go. going to do and this is where we can use an objective metric in the marketplace to help guide us and this is none other

[00:45] than the expected move. So let's go. The expected move is an objective metric in what your opinion is. It doesn't really care what my opinion is based on things

[00:57] like the implied volatility, the stock price or the asset price or the ETF price or whatever and the actual objective like undeniable facts about the marketplace right now. This is what the market is pricing in for the

[01:10] anticipated fluctuations or the anticipated range of that stock or index or asset or whatever over whatever time period you're looking at. It doesn't care what you know the CEO said last

[01:23] night about the company. None of that matters. Which is nice because in a unpredictable, I'm not so sure that stuff's going to help you anyway. And so when you look at an expected move, it's going to give you right around that one

[01:37] standard deviation range, right around that plus or minus one standard deviation range that's going to land, it's going to find itself inside of that it's going to find itself inside of that range about 67 or 68% of the time as we

[01:49] all learned back in our stats 101 classes as undergraduate students at college or university. Or maybe for you it was even in high there. But the nice thing about the expected move, it's not a prediction.

[02:03] giving you a range based on those what you can do is you can use that range to then begin to select a strategy. You can use that range to then to begin to choose your strikes. And the

[02:17] to begin to choose your strikes. And the expected move is going to be a lot more well suited for neutral strategies. So iron condors, short strangles. You can use it for bullish strategies. You can use it for bearish strategies of course.

[02:31] butterflies. I mean it's right there in the name. I mean you can do it for those strategies as well too. But generally speaking, what I want to focus on here today is how we can use the expected move for strike selection around a

[02:44] neutral strategy like an iron condor or a short strangle. So let's pop into tastytrade and let's take a look. Okay, so here I am inside of my tastytrade platform and I've got SpaceX pulled up. They actually report earnings

[02:57] tonight. You can see that right there. So this is a big day for SpaceX. Obviously a huge day in the market as well as it is ripping to the upside. So let's say that I want to set up a 45-day

[03:10] let's say that I want to set up a 45-day trade in SpaceX using tonight's earnings as kind of a catalyst into a regular trade so to speak. If you look inside of a given expiration cycle on the screen, you're going to see this copper strip,

[03:26] this vertical copper strip that's in the center, that is the expected move. So this is a visual representation of the expected move. This is a numerical move. Those are going to essentially be the same number. So if you like to see

[03:41] things visually, there it is. If you like to see things numerically, there it is. They give you the same piece of information. Okay, so with that information in hand, let's delete those ovals, and now I can

[03:54] begin to build my strategy that might be something like an iron condor, might be don't really want to take a directional bias on the stock. I just want to play non-directional elements like time and volatility. So, the first one that we

[04:09] would be just your typical straightforward iron condor. Right? You could sell the 90 put, so I'm right on the edge of the expected move, and then I buy an 85 put. This is going to be the put spread side of my iron

[04:22] to be the put spread side of my iron condor. Then I go to the top. I go above the top of the expected move on the upside. Maybe I sell a 155 call, and then I buy a 160 call. And so, when you look at the way that this iron condor

[04:36] sets up, this is actually a pretty solid trade. I mean, we're collecting about $2 on the iron condor. The width of the iron condor is $5 wide. You can see it's $5 wide on both sides, which is, you know, that essentially offers a line of

[04:51] demarcation of what my maximum loss point could potentially be on the strategy. It's always going to be the width of the iron condor less the credit that you collect. So, my maximum loss, as you see right there, is nothing

[05:06] is is none other than, I should say, the width of the iron condor, $5. You can take either one because, again, they are the same. Less my credit collected, that's your maximum loss. That is kind of the chain of events, that is the link

[05:19] between those three numbers. But you also see the probabilities are in my favor ever so slightly. My iron condors are typically around 50/50 shots, or maybe slightly better than 50/50 shots. My P50 is looking pretty good. I'm

[05:33] got a good amount of positive theta working for me. And so, again, just using the objective metric in the marketplace to build my iron condor, it Okay, so that's the iron condor. But now, let's say you want to do a similar

[05:49] strategy, a neutral strategy, but you don't want to define your risk. You want to take advantage of time and volatility in an unfiltered way. So now maybe still using the expected move as kind of your reference points, now maybe you sell a

[06:03] 90 put and you sell that 155 call, so the same short strikes that we just had, but now you can see your probability of profit is significantly higher. My credit collected significantly higher. Obviously my maximum loss also

[06:18] significantly higher because technically, theoretically, there is no limit to how high SpaceX SpaceX could go and so your maximum loss is going to be unfortunately negative infinity, at least theoretically. But you can see

[06:31] time is working for me. You know, I'm a little bit short delta. My P50 is significantly higher and so I have a lot more functionality and a lot more flexibility with a short strangle, but again, look at how I started the

[06:45] analysis using the expected move to guide me. And so you might look at a trade like this and you're like, "Hey, that looks pretty good, but can I make some adjustments? Can I maybe make it even higher probability and maybe take

[06:57] down the buying power even a little bit more?" And we can certainly do that. We can move our strikes further out of the money. So instead of a 155 call, maybe I go all the way up to a 170 call. And so now you can see my buying power

[07:10] hasn't changed too much, but my probability of profit has increased. might be thinking, "Oh, I kind of want to push that even more." Well, maybe I go from 170 all the way to a 180. And so now you can see probability up a little

[07:23] bit more, credits down a little bit, buying power about the same, but a this point you can keep kind of adjusting and tinkering and tweaking the strikes to get it exactly the way that

[07:35] you want it. But again, the key here is using that expected move as the objective anchor that begins the whole process of analysis. trade that doesn't have a directional bias, so it could be an iron condor, or

[07:48] it could be a short strangle, it could even be a butterfly, use the expected move to your benefit. Like, use this as a piece of your analysis because it is telling you, not based on anyone's opinion, this is the range of

[08:01] fluctuations that the market is pricing in. I hope that helped, and I'll see you in. I hope that helped, and I'll see you guys next time.