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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 volatility index tends to climb. The volatility index falls as volatility falls. The Volatility Index 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?

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.

India VIX: Computation Methodology

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

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

  1. Time to Expiry – To achieve the degree of precision anticipated by experienced traders, the time to expiry is calculated in minutes rather than days.
  1. Interest Rate – The relevant tenure rate, which is for 30 to 90 days is considered as the risk-free interest rate for the respective expiry months of the NIFTY option contracts.
  1. 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 which 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.
  1. 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.

Volatility Index India Market Applications:

  • 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.

FAQ:

Q1. What is India VIX meaning?

VIX, is a real-time market index that measures the market’s estimate of volatility over the next 30 days. When making investing decisions, investors use the VIX to gauge the amount of risk, worry, or tension in the market.

Q2. What does it mean when VIX goes down?

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In basic terms, if the VIX rises, it implies that people are bidding up the prices of puts compared to calls, and if the VIX falls, it suggests that people are bidding up the prices of calls relative to puts. The converse is also true if the price of puts falls in contrast to calls, which might cause the index to fall.

Q3. What does a high VIX mean?

Volatility is high when the VIX is high, which is usually accompanied by market fear. Buying when the VIX is high and selling when it is low is a viable strategy, but it must be balanced against other factors and indications.

Q4. How to read VIX in India?

The projected yearly change in the NIFTY50 index over a 30-day period is one simple method to grasp India VIX. For example, if the India VIX is now at 11, this simply implies that traders anticipate 11% volatility over the next 30 days.

Q5. What determines VIX spikes?

The VIX begins to climb during times of financial stress and gradually decreases when investors get comfortable. It is the market’s most accurate predictor of short-term market volatility. It measures the degree of price volatility suggested by the options markets, not the index’s actual or historical volatility.

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