Traders use the “**Rule of 16**” to **easily convert “annualized volatility” into “daily volatility” and vice versa**.

**Daily Volatility = Annualized Volatility /16****Annualized Volatility = Daily Volatility x 16**

Implied volatility, e.g., the VIX Index, is typically expressed in annualized terms. Unfortunately, an annualized volatility is essentially meaningless if you are a short-term option trader. The Rule of 16 is what allows you to place that annualized implied volatility quickly into a meaningful number.

## Why the Rule of 16 works?

Because the NYSE and NASDAQ average about 252 trading days a year, the formulas to convert annualized volatility (e.g. the VIX Index) to daily volatility and vice versa are:

**Daily Volatility = Annualized Volatility / √ 252****Annualized Volatility = Daily Volatility x √ 252**

The square root √ 252 = 15.87 or approximately 16. Therefore, professional options traders use the quick and easy calculation and divide and multiply by 16.

## Knowledge of the Rule of 16 makes it easy and intuitive

With the rule of 16, you can get a good sense of daily volatility even without a calculator. Just keep the table below in mind:

Annualized volatility( e.g., VIX Index) | Daily volatility |
---|---|

8 | 0.5% |

16 | 1% |

32 | 2% |

48 | 3% |

64 | 4% |

80 | 5% |

A daily volatility of 1% means that there is 68% probability (or approx. 2/3 of the time) for a daily price range of -1% to +1%, this is also called the “**Daily Expected Move**“. The probability for the daily price to trade up or down by more than 1% is approx. 1/3 of the time.