The VIX measures the volatility that S&P 500 options imply over the next thirty days. It is stated as an annual percentage, the way an interest rate is. That convention makes different periods comparable. It also makes the raw figure hard to use on a single trading day.
The shortcut
Divide the VIX by 16 and you have an approximate one-day move in percent. A VIX of 16 implies daily moves of about one percent. Double the VIX and the daily figure doubles.
That daily figure is one standard deviation. In plain terms, it is the size of a typical day as the option market prices it. Most sessions are priced to finish inside that distance from the prior close, and some are priced to finish outside it.
Where 16 comes from
Volatility does not grow in a straight line with time. It grows with the square root of time. A year has about 252 trading days. The square root of that is close to 16.
So to go from an annual figure to a daily one, you divide by that square root. The same logic gives other periods. For a week of five sessions, multiply the daily figure by a little more than two.
What it does not say
It gives a size and no direction. It also describes a typical day and sets no limit. Markets produce large days more often than a simple bell curve allows, so the outer moves are underweighted by any rule of this kind. Expected move versus standard deviation goes into that difference.
Three ways it misleads
First, the VIX covers thirty days and spreads the expected movement evenly across them. Real weeks are uneven. A day with a major release carries more than its share and a day with nothing carries less. The shortcut gives the average day, which may not exist that week.
Second, implied volatility usually sits above the volatility that follows. Option sellers are paid for carrying risk. So the daily figure from the VIX tends to run above the typical move that then occurs, a gap known as the volatility risk premium.
Third, it is an S&P 500 figure. The Nasdaq 100 and the Russell 2000 have their own gauges, the VXN and the RVX, and the same division applies to each of those for its own index.
The shortcut against the expected move
A session’s expected move taken from that day’s own options is the more direct measure, because it prices that day and not an average of thirty. The expected move explains how it is read. The rule of 16 is the quick check on whether the two broadly agree. When the day’s own figure is well above the shortcut, something is scheduled.
Where NoVo shows it
The Trader dashboard shows the expected move for SPY, QQQ and IWM beside dealer positioning, with written reads from Dr. NoVo, a markets SI. NoVo’s free volatility page ranks VIX, VXN and RVX against their own history.