Teach Me Like I'm Five: Investing Concepts Made Simple Decoding Volatility with the Rule of 16
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May 22, 2025 
Matt Cashman, Principal of Investor Education at the OCC, breaks down the often-misunderstood Rule of 16, simplifying how traders can interpret market volatility. He explains its significance in turning annualized volatility into actionable daily insights. The discussion covers the psychological impacts of market surprises and how traders adjust their strategies. With real-world examples, Cashman illustrates the importance of understanding volatility for better risk management and informed trading decisions.
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Rule of 16 Simplifies Volatility
- The Rule of 16 converts annualized volatility into expected daily price movement.
- This helps traders understand how much a stock should typically move each day, making volatility more actionable.
Calculate Daily Movement Baseline
- Calculate expected daily movement by multiplying implied volatility (in decimal) by stock price and dividing by 16.
- Use this to set a baseline daily expectation for price changes.
Big Moves Trigger Risk Alarms
- A $7 move in a $100 stock with 20% implied volatility equals a 5.6 standard deviation move.
- Professional traders recognize this as a huge, risk-desk calling event.