It can be hard for active traders to profit from a stock or option that doesn’t move, which is why they often look for a certain amount of volatility.
But an unexpected spike in implied volatility can also wreak havoc on a portfolio. Traders can guard against this—and potentially use it to their advantage—by monitoring the Market Maker Move (MMM) feature on the thinkorswim® platform from TD Ameritrade.
Find MMM by opening thinkorswim, clicking the Trade tab, and selecting All Products. MMM is shown on the same line as the symbol box, to the right of the bid and ask. The number shows the current expected magnitude of price movement in dollars, based upon market volatility, from an event scheduled to occur between now and the front-month option expiration.
Much of the time, there is no MMM value present. When that's the case, it simply means the options market isn't pricing in any excess volatility. In normal markets, implied volatility is lower in the front month options contract than it is in deferred months. When the market is pricing in a potential outsized move, such as right before an earnings release or other company announcement, front month implied volatility might be higher. That's when you'll see the MMM displayed, like in figure 1 below.
Interpreting the Market Maker Move
As you may have guessed from the name, MMM uses some of the same inputs that market makers do, such as stock price, volatility differential, and time to expiration. A proprietary calculation then reverse-engineers the option pricing model based on assumptions about implied volatility, creating an estimate of potential daily price movement.
Note that the MMM number does not guarantee a stock will move by a certain magnitude, nor does it indicate in which direction a move might occur. It only means the options market has priced in an expected move—up or down—over and above that of a typical trading day.
Let’s say that XYZ is trading at $100 and has an MMM number of ±10. This tells you the options market has priced in a move to as low as $90 and also to as high as $110, in light of an upcoming event such as earnings. Of course, there are no guarantees—the actual move could be more or less, up or down, or there could be no reaction at all.
If you're trading earnings season, or if you're an investor holding shares of a company that's about to release earnings, MMM can be a powerful tool.
How to Use the Market Maker Move for Earnings
Trading around earnings can be tough, but MMM can give you invaluable insights and help you to determine what strategy you want to employ (if any).
For example, if you have an existing position going into earnings, checking the MMM might be a good way to decide if it’s worth the risk to hold through the event. If your stock is trading at $50 and there’s a MMM number of ±1.25, you might be comfortable with an event risk of 2.5%. But if the MMM number is $5.50, implying a potential 11% move, you might not want to hold your position.
The Market Maker Move feature can be particularly powerful when it comes to building an option strategy around earnings. Take, for instance, a stock that is heading into earnings. Say it’s trading at $100, with an MMM number of ±8. The implied move would then be between $92 and $108, so if you wanted to sell a strangle—hoping to capitalize on the collapse of volatility after earnings are announced—you might set your strikes outside that range. Of course, in this or in any other scenario, a trader selling a strangle would first need to be a candidate for the very most risky options trade. Since one leg of a short straddle is a naked call, the risk is unlimited.
Or, if you wanted to put on a purely directional trade using a put or call, you could compare the at-the-money (ATM) options to the MMM number. For example, if the ATM options are trading for equal to or more than the MMM number, you would have a lower chance of profiting on the trade. But if the ATM is trading for less than the MMM number—implying a potentially larger move than is being priced in—it might be a trade worth considering.
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