What is VIX?
Most people know about the VIX. This is a great tool to show the market’s expectations of future volatility. The VIX is a measure of a 30-day implied volatility as indicated by the pricing of S&P500 options. Investors can use it to get a rough idea of what the daily move for the S&P500 might be.
How to do this calculation
The method used is to take the level of the VIX and then divide it by 16 (this is the square root of 252 with 252 being the number of trading days). So, this means that if the VIX is trading at 16 it would be reasonable to look for a move of 1% for the day. If the VIX is trading at 32 then you could look for a daily move of 2%.
For the monthly calculation, you simply divide the VIX by the square root of 12. This is 3.46 and represents the number of months in a calendar year. So, if the VIX is trading at 3.46 it would mean you could expect a 30-day move in the VIX to equal 1% of movement in the S&P500. If the VIX is trading at 20 then you would divide 20 by the square root of 12 to get 5.77%. This means you could expect the S&P500 to move 5.77% over the next 30 days.
Remember that when the VIX is high it is usually indicative of heavy selling, and the lower reading for the VIX is usually indicative of underlying sentiment being positive for the S&P500. Take a look at the VIX below and note these calculations to guide your expectations in the future.