Today I'm going to share a little trick that I like to use to help put the current market volatility into perspective.
The math is like this. I take the value of the VIX and divide by 16. And that's what the market is pricing in for a normal daily move.
For example, if the VIX is at 24, then I would expect a 1.5% move in the S&P500 each day.
So if the VIX is at 16, then I would expect a 1% move.
If the VIX is at 32, then I would expect a 2% move.
Simple.
Now, many people wonder why it's 16, and that's where we get way above my paygrade. If you don't understand how the math around options works, don't worry. No one else does either.
I'm not even joking. Options math is next level impossible. Just ask any of the best options traders. They'll be the first to tell you.
The 16 number I believe has something to do with the square root of the number of trading days in a year, but I'm confident there's more to it than that.
Also, for you statistics majors, I believe there is technically like a 67% probability of these results, or something along those lines.
So keep in mind that The Rule of 16 is just a back of the napkin tool to keep life simple and help put things in perspective.
It's not meant to be an exact science. For the exact science, here's the bible. All I can say is - good luck with that.
I'll stick with the simple stuff.
So what we want to do is take this and make it part of the overall weight of the evidence. Then we want to apply it to current markets to help us decide what we want to do in this current environment.
There are trades to be had and money to put to work.
This week was our LIVE Monthly Charts Strategy Session. This is where we discuss all the major trends and how we want to profit from it - in both Stocks and ETFs. Click here to get access to the video, download the charts and review each of the new trade ideas.
