The VIX number is the size of that standard deviation in annual percentage terms, but since volatility is a function of the square root of time, in order to translate that annual standard deviation number into a daily number, one has to divide by the square root of the number of trading days in a year. A year typically has about 252 trading days and the square root of 252 is 15.87, which options traders generally round up to 16 in their head. Hence the “Rule of 16.”
Using 16 makes it easy to do some quick math in one’s head. If the VIX is at 16, as it was a little over a month ago, one would expect that 68.2% of the time (one standard deviation), the daily change in the SPX would be 1% or less and 31.8% of the time it would be 1% or more.
