Read the implied move off a pricey straddle

Question

A stock trades at \250 with earnings tonight. The at-the-money straddle expiring this week costs \10. What is the market-implied expected move in dollars and percent, and what standard deviation of the move does that straddle imply?

Accepted Answer

Straddle equals expected absolute move. The ATM straddle pays \max(ST - K, 0) + \max(K - ST, 0) = ST - K, so its price is the risk-neutral expectation of the absolute move: 	ext{Straddle} = E[\,ST - K\,] = E[\,	ext{move}\,]. A \10 straddle on a \250 stock means the market prices an average absolute move of about \10, i.e. an implied move of \frac{10}{250} = 4\%. A close near 260 or 240 is "typical"; the buyer wins if the move exceeds \10, the seller if it is smaller. Back out the standard deviation. If the move is roughly normal with standard deviation \sigma{	ext{move}}, then E[X] = \sigm…

Read the implied move off a pricey straddle

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