Volatility is inevitable in the stock market. It is what builds the market, as everyone in the market is only trying to cash the volatility. This may sound bizarre to your ears; however, this is the truth, and let me explain to you why. It is the volatility that makes the stock prices and other commodity prices move up and down. While one may try to figure out the next possible movement, there is no certainty on that, isn’t it? This is volatility, the very factor of how the stock market works. Having said that, for making your trades optimized for better returns and limiting the losses, it is important to understand how much volatility there is in the market. This can be done with the India VIX index. 

Here in this article, we will be talking about the India VIX index in detail, covering how it is calculated, why it is important, factors affecting the index, significance, and a lot more. 

What is the India VIX Index?

National Stock Exchange (NSE), to measure the overall stock market volatility, came up with the India VIX Index. The index takes into account various factors to track the market volatility, which include – market price, expiry dates, bid-ask price of Nifty options for both near and next month term, risk-free returns, and more. 

If the India VIX index rises, then it indicates a bearish sentiment in the market, when the volatility heightens. It also indicates something big is going to happen in the market, which can swing the prices massively. Basically, increasing the VIX index means rising uncertainty. A decreasing index indicates bullish sentiments taking over the market, and investors are regaining their confidence and faith in the market. 

How to Calculate the India VIX Index?

The method of calculating this volatility index has been developed by the Chicago Board Options Exchange (CBOE). For the calculation, Nifty options data are taken, then mathematical techniques are applied to derive the India VIX index value. 

Formula  

The India VIX Index Formula is as follows – 

India VIX = 100 * [Sum (Weighted Implied Volatility Squared)/ Total Weight] ^1/2

Here:

• Sum (Weighted Implied Volatility Squared) is the sum of squared implied volatilities, which are individually multiplied by their respective weights
• Total Weight is the sum of the open interest of all options that are used in the calculation of the index value.

Significance of India VIX Index

• Identification of Market Volatility: To begin with, this index is pivotal in understanding the market volatility. This index can help you understand how much the market will be volatile for the upcoming thirty days. Though it is an anticipation but this helps in planning your trades wisely.  
• Risk Assessment: Understanding this index is crucial for gauging the market volatility. When you understand the volatility present in the market, you take proper measures to address it. Thus, it helps in the risk management of your portfolio. You can adjust your trading and investment methodologies, strategies according to the volatility of the market to optimize your returns. 
• Correlation with Market Indices: Market indices have a negative correlation with the India VIX index. This means, when the India VIX index goes up, the market indices usually dip, and vice versa. This happens as when volatility increases, the VIX index increases and the market becomes sluggish, dragging the market indices down. 
• Option trading and PMS: Understanding this volatility index can help you in many ways in option trading and portfolio management as well.  

Factors influencing Index VIX Index

• Geopolitical Events: Geopolitical situations affect the markets across countries, and so they do in India. The global events influence the index as global events influence investors’ sentiment. When there is a war like the recent one going on between Middle East countries, the tension escalates, so does the uncertainty, and thus the India VIX index rises. 
• Economic Surveys and Data: You can see the index going up before the budget, or economic surveys, as that depicts market sentiments. If the economy seems to be on track, then the index comes down; otherwise rises, making the market more volatile. 
• Corporate Earnings: Often, corporate earnings also affect the market volatility, and so does the index. If corporate earnings don’t go as anticipated, and decrease against the same, then volatility increases, as uncertainty increases again. However, if earnings are good, either at par or better than anticipated returns, then the volatility can decrease, and so does the index value.
• Political Scenario: The Domestic political scenario is another crucial factor that affects the index. If there is instability in the government or political turmoil, then businesses get affected, in turn, volatility increases, and the index as well, and vice versa. 

Uses of Index VIX Index in the Stock Market 

• Long-term investors can use the India VIX index to understand the sectors’ volatility and plan their investments accordingly. Though volatility evens out in the long run, to optimize returns, analyzing the volatility and investing according to that is useful. 
• For Short-term investors, this index is crucial as they need to understand how much volatility is present in the market. Accordingly, they can plan their entry and exit strategies. 
• This index can be pivotal for hedging tactics. If the market is highly volatile, then the investors and traders can apply hedging tactics to minimize their losses.  

Wrapping Up

Thus, the India VIX index is pivotal to stock market investors, traders, portfolio managers, hedge fund managers, and anyone who is in this field. As volatility is an integral part of the market, managing it is the key to successful investment, and the tool to begin with is the India VIX Index. 

India VIX Index | FAQ

Source: NSE

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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.