$VIX Trick

• Posted by DynamicHedge
• on August 16th, 2011

The $VIX is a very misunderstood index.  One could go into all sorts of detail about how the $VIX is calculated and the relative problems associated with trading volatility products.  Instead, here’s a dead simple calculation traders can use everyday.  Take the current $VIX index calculation and divide it by the square root of 252 (number of trading days in a year).  Divide the result by 100 to give you the expected percentage change.  Then take previous closing price of the $SPX and multiply it by the expected percentage daily change and you will have an approximation of how many handles worth of volatility you should expect from the $SPX.

Based on the charts above, the calculation for today is:

32.85 / √252 = 2.07%

1192.76 * 0.0207 = 24.69

Tomorrow I’m expecting the $SPX and $ES_F to be bounded by approximately 24.5 handles 68% of the time.  As the day progresses you can adjust based on whether the $VIX is expanding or contracting.

Remember, the $VIX is not predictive.  The numbers are just estimates of expected volatility.

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