WEM is the acronym for Weekly Expected Move, the high and low range for the week set by the options market for any index or security. The WEM is the hedging range that dealers and market makers use to hedge the other side of weekly options trades, expiring at Friday’s close.
Traders should calculate the WEM as of the previous Friday’s close for the week ahead. The probability of the security price staying within the range is 68%. Traders can use the levels as targets for either directional or non-directional trades.
Frequently, the index or security price tags the WEM high or low, then stalls or trades within a few points of the breached level for the remainder of the week. Less often, the security or index reverses at one level and travels to the other.
If the price materially breaches either level, dealers and market makers must hedge in the same direction of the breach, exacerbating the move.