Last Update: July 2021
Gather ’round boys and girls: today I’m going to reach deep into my bag of tricks to unveil one of my favorites.
It’s handy in all sorts of market conditions, but particularly so when the crazy train comes to town. You know, like now. When the denizens of the Street are running around with their hair on fire. When random gaps greet you each morning and multi-percent moves become commonplace. This particular tactic provides context and proper expectations for volatility.
‘Tis a VIX trick.
I first introduced you to the VIX, formally known as the CBOE Volatility Index, in The Fear-O-Meter back in July. Go back and read it if you haven’t.
Also, why haven’t you read it? Good gosh man, I’m trying to educate you, but there’s a method to the madness. Order, chronology and such. So go read it and return.
I’ll be here when you get back.
The VIX is like a Swiss army knife, a multi-purpose tool with a gajillion uses. In July’s missive, I highlighted how the VIX is used as a contrarian indicator to identify when extreme fear is present. Today I’ll show you how the VIX level suggests how much the market should move on a daily basis.
And why is that handy?
Well, wouldn’t you like to know if the market is expected to move 0.5%, or 1%, or 2% per day? I suspect you would trade differently or at least adjust your expectations if 2% daily moves are the norm. In case you weren’t aware, 2% daily moves on an Index like the S&P 500 are kind of insane.
Enough with the preamble; on to the trick.
Volatility is expressed as a percentage and represents a one standard deviation annualized move. Yes, I know I went all math speak on you there, so allow me to unpack things a bit. First, volatility, hereafter referred to as vol because that’s what the cool kids call it, is expressed as a percentage. So when you see the VIX at 30, we say it’s at 30%.
Second, vol represents a one standard deviation move. If you reflect back to your days of statistics class you’ll recall, unless you dozed off, you slacker, a one standard deviation move should occur roughly 68% of the time. That’s about 2/3 for those of you who prefer the measuring cup method.
Basically, vol doesn’t predict the move we’ll see 100% of the time, but rather the price move we should see most of the time. It’s a one standard deviation move, ya dig?
Third, it’s an annualized move. Or, a move you should see over one year.
So, a VIX of 30 means the S&P 500 could rise or fall 30% over the next year. That’s the expected move given current option prices. Now, it’s not a guarantee; the range of up/down of 30% represents a one standard deviation move, so there’s approximately a 68% chance we remain within the range.
Here’s where the trick comes in.
No active trader is going to hold a position for one year. Knowing the expected move for that long, then, isn’t relevant. It would be much more helpful if we could determine the expected daily move for the market.
…and we can with the Rule of 16.
Just take the VIX, or any measure of implied volatility, and divide it by 16. That will give you the expected daily move for the market based on current option premiums. When the VIX is at 16, the market is pricing in 1% daily moves. When it’s at 32, like now, the market is pricing in 2% daily moves. On the rare occasion when it rises to 48, it’s pricing in 3% daily moves, or insanity, in other words. Now you know why it rarely gets that high.
And, you also know why in normal markets it spends its days sub-16. Because in normal markets the S&P 500 doesn’t move 1% a day. It moves less.
Class dismissed.
Options Trading for Beginners
Continue learning the basics of Options trading with this additional freemium content from Tackle Trading.
Options 101 [Free Content]
Access more free high-quality articles to improve your knowledge of Options Trading.
Options for Beginners: Meet a Popular Greek Named “Delta”
In this article, Gino Poore delivers a great lesson on understanding and using the Delta of an option.
How to add Insurance to your Portfolio
In this video tutorial, Coach Matt takes a look at different ways to protect your portfolio accounts when the market goes south.
Options 101: Getting Started
The goal of this Options 101 series is to educate you as a trader and help you develop the right perspective on how to use options in your business.
Options 101: Expiration, Strikes, and Basics
Learn the basics on what is an option, options expirations, call and put options and also strike prices.
Options 101: Bid/Ask, Open Interest and Volume
In this Options 101 article, we will look at the Bid/Ask spread, open interest, volume, and how these characteristics affect a trader’s decision-making.
Options 101: The Language of Options
In this article, we’ll dive into some of the language and definitions you’ll hear as an options trader.
Options 101: Naked Put Basics video
In this video edition of the series, Coach T examines the basics of the Naked Put strategy.
Options 101: Managing Credit Spreads (Thinkorswim Tutorial)
In this tutorial video, Coach T shows how to manage a credit spread and how to set up a contingency in ThinkOrSwim.
Options 101: Bull Put Spread Research
In this video, Coach Tim walks you through how to find candidates for bull put spreads.
Options 101: Risk Graph Basics (Thinkorswim Tutorial)
In this Thinkorswim tutorial video, Coach T walks the team through how to use the risk graph for options trading.
Options 101: How to set Basic Stops on Naked Puts and Covered Calls
In this video tutorial, Coach T walks the team through how to set a basic stop on a covered call or naked put position.
How to Protect Your Retirement
Coach Matt from Tackle Trading looks at how passive and active investors can insure their retirements against another potential market crash like in the sub-prime crisis of 2008-09.
How to use the Theta Research Tool to find the best stocks for Cash Flow
In this video tutorial, Coach Matt goes through the latest edition of the Options Research Spreadsheet explaining how to use it to find the best stocks to cash flow.
Options 101: How to Add a Protective Put to A Covered Call
In this video, Tackle Trading’s Coach Tim explains when, how, and why a trader would buy a put option on a covered call position.
Tales of a Technician: Quell your Unfounded Assignment Fears
The assignment hobgoblin has been haunting the dreams of novice traders since the dawn of the options market.
Options 101: How to protect against earnings risk
In this video, Coach Matt shows new traders how to protect against the earnings risk and still cash flow with the covered call.
Trade Journal Series: How to use the Theta Research to find Covered Call candidates
In this video tutorial, Coach Tim Justice teaches how to find the best candidates to trade the Covered Call options strategy using the Theta Research tool.
Tales of a Technician: Delta Limits
“On Delta trading, what would be a reasonable delta limit for my portfolio?” Let’s hop to it.
Women In Trading: Options – My new love language
Let us talk options basics. Let me try to help you make sense of it all.
Options Theory: Long Calls
The long call is a seductive chap. Today kicks off the first in a multi-part series on options strategies.
Options Theory: Naked Put Basics
Today we turn to a popular cash flow strategy: the Naked Put. Come learn the basics.
Options Theory: The Protective Put
The options realm is an insurance marketplace where stock owners can acquire protection against loss in their beloved equities.
Options Theory: Delta, the Great Equalizer
I love the options greeks for many reasons. One will be on full display today. Delta is a multi-faceted metric used by traders a variety of ways. Perhaps one of my favorites is to use it as an equalizer.
Options Greeks Guide Part 2: What Is The Black-Scholes Model
What is the Black-Scholes Model and how to use it in your trading? This is what this video will cover.
Options Greeks Guide Part 3: What Is Delta
Delta is the most famous options Greek. Come learn what Delta is and how it can help you become a better trader.
Options Greeks Guide Part 4: What Is Theta
To professional traders, Theta means CASH FLOW and PASSIVE INCOME. Come learn more about this powerful option Greek and how it can benefit your trading skills.
Options Greeks Guide Part 5: What Is Vega
How does Vega work? What is the correlation between Vega and volatility? How does it affect options premium? That is what you will learn in this video.
Options Greeks Guide Part 6: What Is Gamma
What is the correlation between Gamma and Delta and how does that impact your trading business? Learn more about this underrated option Greek in this video.
Options Greeks Guide Part 7: What Is Rho
What is Rho? How does Rho affect options premium? This is what you will learn in the latest episode of this Options Greeks video series.
Options Theory: What is Implied Volatility Rank?
In this week’s video, I’ll show you how to understand Implied Volatility (IV) and Implied Volatility Rank (IV Rank).
Tackle Today: Call Options
Call Options is all about leverage and limited liability. Read further.
Tackle Today: Options Greeks Webinar
Mark your calendars for Monday, Feb 28th. On our YouTube Channel at 8:30 PM EST, I’ll be hosting a webinar titled Options Greeks for Beginners.
Tackle Today: Delta is for Direction
Delta might be the most fascinating Greek for the simple fact that it is multi-dimensional.
Tackle Today: Delta Brings Precision to Probability
Delta measures the probability of an option expiring in-the-money.
Tackle Today: Theta & Time Decay
Theta measures how much an option loses in value per day.
Tackle Today: Vega & Volatility
Volatility plays a significant role in options pricing. Read further.
Tackle Today: Gamma & Velocity
As a final message to prepare you to tonight’s webinar, let’s talk about option greek gamma.
The Options Heuristic Series [Free Content]
How can we explain the basics of Options so that our students can really learn, without getting confused with so many concepts, terminologies, and strategies? That’s the idea behind the series.
Options Greeks Guide [Free Content]
The Options Greek Guide is a simple, powerful resource to help you better understand how to use the Greek’s.
As you build, enter, and manage Options Trades, it’s helpful to understand the math behind the Black Scholes Option Pricing Model. Using the Options Greek Guide will give you the information and training on how time, volatility and asset price changes impact options values.
Options 101 Course [Premium Content]
The Options 101 Course is exclusive to PRO members. Try it for free for 15 days by clicking on the button below.
Options Report [Premium Content]
The Options Report is a weekly briefing delivered to Pro members of Tackle Trading. In this report, you will receive information and education that will help you develop as a trader. We will also highlight attractive trade setups for the coming week that you can add to your watchlist.
Financial freedom is a journey
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
Legal Disclaimer
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.
9 Replies to “Tales of a Technician: VIX Tricks”
Thank you Tyler! Fun to read AND very helpful.
Thanks Tyler for the info. I like the way you describe it. Would you please clarify whether 2% daily move means S&P500 stock price would move 2% either direction from open to close? The intraday move could be even more for day trading consideration, right?
Thanks for the insight. I dig.
love the article, entertaining and helpful thanks Tyler!
Funny, concise, helpful–awesome
Thanks Tyler.
Great explanation, thanks Tyler!
Amish – the 2% daily moves would be relative to the prior day’s close. So when the VIX is at 32 don’t be surprised to see the market rising 2% or falling 2% versus the prior day’s close on a regular basis. When you see the percent change of the S&P 500 on any given day they’re comparing today’s close versus yesterday’s close.
Comments are closed.