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Calculating the Daily Expected Move of The S&P 500 for The Month Ahead

The VIX is the so-called ‘fear index’ that traders use to evaluate how concerned investors are. The VIX is an indicator of 30-day implied volatility from the use of S&P 500 index options prices.

The way it looks is like this: When S&P 500 traders sense risk in the markets, they often buy put options as a downside insurance policy against longs. The sudden demand for put options causes the implied volatility for both put and call contracts to move higher.

So, what does the VIX tell S&P 500 traders about the coming move? You can use the VIX to calculate larger 30-day moves, as well as smaller daily moves. The way to work out the 30-day move for the VIX is by taking the VIX and dividing it by the square root of 12 (we use 12 for each month of the year).

So, if the VIX is trading at 20, then we have the following calculation:

• 20/3.46= 5.78%

So, we know that the recent pricing of the VIX is indicating that the S&P 500 is expected to have an approximate 5.78% move over the next 30 days. The higher the VIX, the greater the expected move.

In this way, you can see what the VIX is saying about the anticipated moves that the S&P 500 is likely to see over the coming 30 days. Traders often use it as a shorthand for global risk in stocks, as the US is rather influential in global markets. After all, when US stocks sneeze, the rest of the world catches a cold.

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