«It tells you what’s priced in.»

Traders,

Yesterday I introduced you to the idea of volatility-based bets. In explaining the difference between going long and short volatility, I mentioned how it all comes down to what the market is pricing in.

Most people refer to it as the “expected move.”

ThinkorSwim calls it the “Market Maker Move” or “MMM.”

You’ll see it crop up at the top of the options chain during earnings season, and it reveals precisely how much the stock is expected to move or gap after earnings.

For instance, Apple reported last night. Heading into the close, its MMM was $7.98. Given the share price of $163.64, that translates into a move of 4.9% up or down. That 4.9% move represents one standard deviation, meaning there’s a 68.2% chance AAPL moves 4.9% or less. In other words, if the options are perfectly priced, then 2/3rds of the time, the stock will stay in the expected range.

If I entered a long volatility trade like a debicon, I’m betting AAPL will move more than 4.9%.

If I entered a short volatility trade like an iron condor, I’d hope AAPL moved as much or less than 4.9%.

As I write this Thursday evening, AAPL is only down about $3.64 after hours. So far, the move is well within the MMM. Assuming we open here in the morning, I would expect the debicon sees a loss at the open and iron condors sees a gain.

Video of the Day: Gino’s Gem: How to use the ATR and Expected Market Maker Move (MMM) in ThinkorSwim (TOS)

Watch this short Gino’s Gems as he shows how to use the Average True Range and Market Maker Move Indicators in ThinkorSwim.

Chart of the Day: Apple’s MMM (Market Maker Move)

Here’s where to find the Market Maker Move in the Trade Tab of ThinkorSwim.

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