Expected Moves for Futures Traders
, 5 min reading time
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.
Let's take a look at an 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. We can only speculate why the options market got it wrong. Our best guess is the recent AI momentum trade has consistently caught a lot of traders offside, causing more people to chase. Given this information, traders may want to discount their reliance on longer time frame 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 x 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.
If you're okay with this limitation, our Dynamic Levels indicator gives you the ability to do this.
Let's say you're trading ES and want to see the SPY levels. Open the indicator properties window. Uncheck Use Chart Symbol and put SPY in the symbol text box. Set the Multiplication factor to the current price of ES/SPY. Click OK. You should now see the levels on your ES chart. These levels will not be exact as ES and SPY fluctuate.
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. It's for this reason, we don't like using the upper and lower levels like 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. While the most accurate approach is to plot these levels on the original instrument, you can also adapt these levels for ES using the multiplication factor setting in our Dynamic Levels indicator. Incorporate these levels into your broader analysis to enhance your trading decisions and strategies.
Try it for free for 5 days by making an account and following our software activation guide.
