A very useful tool for determining what the market as a whole thinks the trading range until expiration of an underlying value will be is the At The Money (ATM) straddle.
The ATM straddle is a combination of the put and call with the same strike price that is closest to where the underlying value is trading. And it is either buy/buy or sell/sell.
?
Those who buy the straddle think the underlying value will move beyond what they paid for it and those who sell it believe that the underlying value will stay within the range where they sold it (the P&L graph on the left above is a long straddle, on the right, a short straddle). Believing, as I do, that Fair Value is where buyer and seller agree on price, the market in its wisdom of supply and demand gives us our?Measured Move Targets (MMT).
Let?s illustrate by looking at the S&P 500 ETF (SPY). Let?s see what the market as a whole believes the trading range will be using the October?options which expire 3 weeks from today, October 21..
With SPY at this writing (9:00 CDT) trading at 215.75 we?ll use the 216 straddle as our indicator. The October 216??call is trading at 2.40 and the put is trading at 2.60?for a total of ?5 points.
This means that the market believes that the trading range of SPY will be 211-221 (equivalent to 2110-2210 in the S&P 500), as our MMT.
Once again, the options market gives the trader/investor invaluable information on where the market believes it is going. As long as you know how and where to look.