Expected Moves for Futures Traders

As a futures trader, leveraging expected moves derived from the options market can be a powerful tool in your trading arsenal. According to Nasdaq, average daily options volume has increased 51% from 2019 to 2020 and has only continued to increase. This rise in options activity has the potential to significantly influence price action, as large options positions lead to hedging activities by market makers, creating buying or selling pressure in the underlying asset. For this reason, futures traders may want to incorporate signals from this market into their analysis.

Average daily options volume from Nasdaq

What Are Expected Moves?

Expected moves represent the anticipated price range of an asset within a specific timeframe. They are calculated from options market data by adding and subtracting the implied volatility from the current price. Price can often be expected to finish in this range within that timeframe.

The expected move is calculated by adding the at-the-money call and put price together. This is done at the end of the day, week, month, and quarter. Note: Only stocks/ETFs with daily expiration have daily expected moves.

Example

We can see that SPY closed within the daily expected move for the entire week and finished within the weekly expected move. However, it closed above the monthly expected move.

Back Testing

Disclaimer: Past performance does not guarantee future results. Traders should always use their judgment when entering a trade.

It's important to back-test the accuracy of these levels over time because options traders are not always right. The ranges tend to be around 68% accurate over the long term, but there can be periods of underperformance.

For example, in the last three months, our back-tests showed SPY closed within the daily expected move 64% of the time. However, the weekly and monthly moves were less accurate at 50% and 0% respectively. Price had a habit of consistently closing directly above the upper level for the longer time frames. Given this information, traders may want to discount their reliance on longer timeframe predictions for the time being.

How To Use Expected Moves As A Futures Trader

There are many ways to use expected moves as a futures trader. Ultimately, the exact strategy is up to you, but here is some general guidance.

We only calculate expected move levels on ETFs, Stocks, and Indices with robust options volume. This does not include futures instruments. However, there are two options:

Option 1 (Recommended): Plot Expected Moves on the Calculated Instrument

The most reliable method is to plot the expected move levels directly on the instrument they were calculated from, such as SPY or SPX. Futures traders can apply their trading strategies on both charts (futures & equity) to determine when to enter a trade in the futures market, in this case, ES, due to the high correlation between the equities and futures.

Option 2: Plot Expected Moves Directly on Futures Instruments

If you lack market data for stocks and ETFs, you can still approximate their expected move levels that were calculated on ETFs and apply them to futures instruments. However, this is less accurate for a few reasons.

One reason is that futures markets are often used for speculative trading and hedging due to their leverage and liquidity. This means price can decouple in the short term from the value of the underlying asset while traders try to figure out the future price.

Take this example: The top chart shows an hourly chart of ES. The bottom chart is the ratio of the closing price of ES and SPY × 10 (we multiply by 10 so the ratio is close to 1). We can see there is about a 1% difference during this trading day. In ES terms, that's about 50 points. This means any levels calculated on SPY and placed on ES might change by 50 points.

For example, if SPY is trading at $500 and the at-the-money call and put options are priced at $10 each, the expected move for the given period would be $20. This means traders anticipate SPY to stay within the range of $480 to $520 with a certain level of confidence.

Strategies

Expected move levels try to estimate where price will finish within a given timeframe. They say nothing about what happens to price during that time. For this reason, we don't recommend using the upper and lower levels as strict support and resistance. It's not uncommon for price to leave the weekly expected range on Monday only to finish within the range by Friday. A better strategy might be exiting an existing trade when price starts to hit extremes or using a mean reversion strategy. Ultimately, this is only one indicator that you should consider in confluence with other tools.

Conclusion

Using expected moves from the options market provides valuable insights for futures traders. Incorporate these levels into your broader analysis to enhance your trading decisions and strategies.