Most traders look at VIX and ask whether they should be scared.
Wrong question. VIX is telling you one thing: how big a move the market expects, every day, close to close.
That number translates directly into points on your screen, and once you can do that conversion in your head, you can answer the only question that matters before you put a trade on.
Will my trade make me money on that move?
Here's how I do the math.
Start with a 12 VIX. That's about a three-quarter percent move in SPY every day, close to close.
A 1% move in SPY right now is somewhere around seven or eight points, so three-quarters of a percent is five or six. Add a little for intraday, because your intraday range is always bigger than your close-to-close range.
It has to be, by definition. If you open and you don't move, you still have a closing price, so the range you travel during the day is at minimum the close-to-close number and usually more.
So a 12 VIX gives you roughly four to seven points of SPY range per day.
Drop to a 10 VIX and you're at about 0.6%, which is two to five points a day. Go the other way to a 16 VIX and you're at 1% a day, five to nine points. We're at 17 right now, so call it 1.1%, and I'm going to say at least five points a day.
Now the question.
When I posted that SPY strangle yesterday, we had the 751 call with the stock trading 748. Two points away.
If I get my five-point minimum move, can I make money on my calls?
Yes.
If we get the top of the range, eight or nine points, better. That's the entire analysis. I'm not guessing direction. I'm asking whether the move the market is already pricing is big enough to pay me.
I'm not in the business of trying to guess these trades.
Now the limit on all of that, because this is where people get themselves in trouble.
The daily number tells you what to expect today. It does not tell you that VIX should fall every time we have a quiet session. Thirty days out, SPY is currently pricing about a $23 straddle, which is 725 on the downside and 775 on the upside, and I'd say that's probably a pretty fair number.
So ask yourself: if we move five dollars today, up or down, does that matter to a straddle priced at $23 a month out?
It doesn't.
Pretend you're a market maker for a second. You're setting a price and buying and selling around it, and a five-point day doesn't change what you'd charge for thirty days of risk. Drop ten and rally ten and you might move that straddle a little.
The market builds a daily move into the 30-day number just by the way the model works.
That matters for what you actually do. It means quiet days are not your signal to sell volatility, because the thirty-day price already assumed those quiet days. What moves that number is a change in the news cycle, not a change in Tuesday's range.
Right now we have an ongoing conflict and an earnings week, and volatility is going to have a hard time getting below 16 for any period of time. If the Strait of Hormuz opens for business and the US controls it, we trade a lot lower within three weeks to a month. Until then you are pricing what you have.
This is how liquidity providers think about it, and it's how the algos are programmed.
Market-making firms have every option tick from the last 25 years, they've run the tests to optimize how they price, they put a price out, and then they adjust once things trade. But they start from this base.
You can price your trades off the same base. That's the whole edge here — not predicting where SPY goes, but knowing what size move you're being paid for before you click.
Andrew Giovinazzi
P.S. Mark and Hans are going live at 4:15 PM ET to break down the Google and Tesla numbers. The entire market has spent this week waiting on Google, and we're about to find out whether the vol was priced right. Join them here.