What is India VIX?

The Volatility Index measures the market's anticipation of volatility in the near term. During moments of market volatility, the market typically moves sharply up or down, and the VIX tends to climb.

VIX falls as volatility falls. It is not the same as a price index like the NIFTY. The price index is calculated by taking the price movement of the underlying equities into account. The Volatility Index is calculated as an annualized percentage using the order book of the underlying index options.

What is India VIX Meaning

India VIX full form stands for India Volatility Index. The India VIX is a volatility index calculated by the NSE from the order book of NIFTY options. The best bid-ask quotes of near and next-month NIFTY options contracts traded on the NSE's F&O segment are used for this.

India VIX reflects investors' perceptions of market volatility in the near term, i.e. it portrays market volatility over the next 30 calendar days. The higher the India VIX number, the greater the predicted volatility, and vice versa.

Importance of India VIX Index

India VIX mirrors the state of risk among investors. When the India VIX is high, the market expects considerable shifts, indicating a volatile time. However, if the India VIX is low, it signifies that the market is anticipating minute changes.

How is India VIX Calculated

India VIX employs the CBOE's computing technique, with appropriate modifications to adapt to the NIFTY options order book, such as cubic splines, etc.

India VIX Formula-

India VIX = 100 * √((Sum[Weighted Implied Volatility Squared])/Total Weight)

  • Sum[Weighted Implied Volatility Squared] denotes the sum of the squared implied volatilities multiplied by the respective weights
  • Total Weight denotes the sum of the open interest of all options used in the calculation

The following elements are taken into account in the calculation of the India VIX-

  • Time to Expiry

To achieve the degree of precision anticipated by experienced traders, the time to expiry is calculated in minutes rather than days.

  • Interest Rate

The relevant tenure rate, which is for 30 to 90 days, is considered the risk-free interest rate for the respective expiry months of the NIFTY option contracts.

  • Forward Index Level

India VIX is computed using the out-of-the-money option contracts. It is identified using the forward index level.

The forward index level helps to determine the at-the-money strike, which in turn helps in selecting the options contract that shall be used for computing. The forward index level is taken as the most recent available price of the NIFTY future contract for the respective expiry.

  • Bid-Ask

The ATM strike is the strike price of a NIFTY option contract available slightly below the forward index level.

Option NIFTY option and call contracts with strike prices higher than the ATM strike Out-of-the-money options are put contracts with a strike price less than the ATM strike, and the best bid and ask prices for such option contracts are used to calculate the India VIX.

In the case of strikes for which relevant quotations are not available, values are calculated by interpolation using a statistical approach known as the “Natural Cubic Spline.” Following quotation identification, the variance (volatility squared) is determined separately for near and mid-month expiry.

To understand a Volatility Index, one needs to go back to the 1970s when there was no significant method of determining investor confidence. The markets often ran on speculation. It made determining a stock’s ‘fair price’ extraordinarily difficult. 

In 1973, three economists- Fischer Black, Robert Merton and Myron Scholes devised a model that changed the process of option pricing. The ‘Black Scholes Model’ is currently used globally to measure market volatility. 

For their path breaking work, the trio won the Nobel Prize for Economics in 1997. However, Merton had passed on before that year, and the model is named after the remaining survivors.

The model is represented as follows -

C=St​N(d1​)−Ke−rtN(d2​)

When: d1​=σs​ tlnKSt​​+(r+2σv2​​) t

plus: d2​=d1​−σs​ t

In this model, the legends mean the following -

C = Call option price

S= Current stock price; other underlying price(s) may be considered

r= Interest rate (risk-free)

K= Strike price

N= an ordinary/normal distribution

t= time to maturity

How To Use India Vix For Trading - Volatility Index India Market Applications

Now that you know what does India VIX indicate, understand its market applications here-

  • The VIX is a very excellent and sound indicator of market risk for equities traders. It informs intraday traders and short-term traders about whether market volatility is increasing or decreasing. They will be able to fine-tune their plan as a result.

    When volatility is expected to spike rapidly, intraday traders face the danger of stop losses being triggered abruptly. As a result, they can either lower their leverage or expand their stop losses correspondingly.

  • The VIX is also an excellent indication for long-term investors. Long-term investors are usually unconcerned by short-term volatility.

    However, institutional investors and proprietary desks have risk and MTM loss restrictions. When the VIX indicates that volatility is growing, they might raise their hedges in the form of puts to play the market both ways.

  • The VIX is also a helpful indicator for options traders. Volatility is typically used to determine whether to purchase or sell an option. When volatility is expected to grow, options become more attractive, and buyers tend to profit more.

    When the VIX falls, there will be more squandering of time value, and option sellers will gain more.

  • It may also be used to trade volatility. If you expect the markets to become more volatile, one option is to purchase straddles or strangles. However, when volatility is expected to grow, these become prohibitively expensive.

    A better strategy would be to buy futures on the VIX index itself, allowing you to profit from volatility without having to worry about the direction of market movement.

  • The VIX is a very accurate and dependable indicator of index fluctuation.

    If you plot the VIX and the Nifty movement over the previous 9 years, you will notice a definite negative association in the charts. Markets generally top when the VIX is at its lowest, and markets typically bottom when the VIX is at its highest. This is an important input for index trading.

  • The VIX index is a useful asset for portfolio managers and mutual fund managers. When the VIX has peaked, they can try to increase their exposure to high beta stocks, and when the VIX has bottomed, they can add to their exposure to low beta stocks.

India VIX vs Nifty

The difference between the India VIX and Nifty 50 Index is simple to decipher.

The Nifty 50 Index tracks the performance of the 50 biggest Indian companies and serves as a standard for the stock market of India. India VIX, on the other hand, is a volatility index that measures the market’s expectation of volatility in the Nifty 50 in the forthcoming month that is derived from its options prices.

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