Accuracy of the Expected Move (Part 1)

Last year, the following post appeared in a trading forum I follow:

> Using ATM straddles to estimate expected moves is
> very inaccurate, to say the least. I remember seeing
> this in some “beginner’s tips and shortcuts”
> resources years ago.
>
> For those interested in a more accurate, but still a
> quick-and-dirty estimation:
> https://www.tastytrade.com/tt/learn/expected-move
>
> You could always go more advanced and use a tool
> like Hoadley’s and GARCH(1,1) model. Or just use TOS
> IV numbers and Analyze tab to keep it simple.

I responded with the following:

> I don’t mean to sound critical but I think you
> bring up a couple good points worthy of
> discussion.
>
> Who knows how good either ATM straddles or
> any other formula is to estimate expected moves?
> In other words, who has done the research to
> study it?
>
> I’m guessing there are traders who have
> backtested this. I am not aware of backtesting
> data targeted for the public domain before
> Tasty Trade (TT). TT studies actual vs.
> expected moves all the time. I’m not sure if
> they’ve looked at ATM straddles vs. any other
> approach (like average of ATM straddle and one
> strike OTM strangle), though.
>
> A separate question from what is a good estimate
> is what is the expected move? The answer to
> this is whatever “most people” (or the “loudest
> talking heads”) regard as the expected move.
> In most cases, I think this is terminology that
> many people throw around casually without
> precisely defining. In most cases too, I think
> most people hear the term and think they
> understand even though they probably don’t
> because the definitions aren’t given.
>
> There’s a lot of crap in the Financial
> [trading/education] space that is neither
> actionable nor reliable. I believe we’re
> even bombarded with such information in
> this forum. That’s not to say forums like this
> aren’t worth reading though. Between the
> cracks, people do offer up some really good
> ideas every now and then.

I will conclude next time with a bit more commentary on this subject.