Calculating the daily expected move of the S&P500 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&P500 index options prices. The way it looks is like this. When S&P500 traders sense risk is in the markets they will 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&P500 traders about the coming move?
You can use the VIX to calculate larger, 30 day moves, and 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:
So, we know that the current pricing of the VIX is indicating that the S&P500 is expected to have a 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&P500 is likely to see over the coming 30 days. Traders use it as a shorthand for global risk in stocks as the US is so influentially in global markets. When the US stocks sneeze, the rest of the world catches a cold.