What if there was a way to gauge the mood of the Indian stock market? How about a powerful tool to enhance your trading strategies? India VIX is the tool that can help you with that. It is the volatility index of the National Stock Exchange (NSE). Now, what is India VIX, and how does it work?
Let us take a look!
India VIX Meaning
India VIX, or the India Volatility Index, is a measure of market volatility or the degree of price fluctuations in the Indian stock market.
It is often called the “fear index” or the “fear gauge” as it rises when the market is uncertain and falls when the market is calm or confident.
The Volatility Index measures how much the market is expected to swing up or down in the near future.
When the market is really up and down, the Volatility Index goes up, too.
As things calm down, the Volatility Index goes down.
It’s different from a price index like NIFTY, which just shows how prices are changing. Instead, the Volatility Index looks at the order book of index options and shows the expected swings in percentage terms over a year.
The Chicago Board of Options Exchange (CBOE) started the Volatility Index in 1993 for US markets based on S&P 100 Index option prices.
Later, in 2003, they changed it to S&P 500 Index options.
Since then, it’s been a way for investors to see how wild they think the market will be. Investors use it to decide how risky they want their investments to be.
What is INDIA VIX and How Does it Work?
It is a Volatility Index made by NSE using NIFTY Options.
It quantifies the rate and magnitude of price changes, often synonymous with risk in finance.
NSE computes this volaliy index using the order book of NIFTY Options.
It considers the best bid-ask quotes of near & next-month NIFTY options contracts traded on the NSE (F&O segment).
The volatility Index shows investors’ perception of market volatility in the near term. Thus indicating expected market volatility over the next 30 calendar days.
In simple terms, India VIX shows how much traders expect the stock market to change over the next 30 days.
It’s like a thermometer for market volatility.
- Low VIX values (below 15) usually indicate low volatility and a relatively stable market environment.
- High VIX values (above 20) suggest high volatility and uncertainty in the market.
- Extreme VIX values (above 30) often indicate heightened fear and panic in the market.
Volatility Index can help you understand the range of movement of the NIFTY index. This helps you plan your entry and exit points, set stop losses, and hedge your positions. It can also help you identify trading opportunities based on the divergence between the actual and implied volatility.
How India VIX is Calculated?
Here are the few steps followed:
- Calculate Variance: Compute the variance for the near and mid-month expiry separately.
- Interpolation: Find the average variance for a fixed 30-day maturity period.
- Compute India VIX: Take the square root of the interpolated variance value and multiply by 100 to arrive at the value.
India VIX utilises a computation methodology similar to CBOE, with necessary adjustments to suit the NIFTY options order book.
The key factors involved in its computation include:
- Time to expiry:
Time to expiry is measured in minutes rather than days to meet the precision standards expected by professional traders.
- Interest Rate:
The relevant NSE MIBOR rate (30 days or 90 days) serves as the risk-free interest rate for the corresponding expiry months of NIFTY option contracts.
- The forward index level
India VIX uses out-of-the-money option contracts identified through the forward index level. This level aids in determining the at-the-money (ATM) strike.
It is crucial for selecting the option contracts used in computing.
The latest available price of the NIFTY future contract for the respective expiry month determines the forward index level.
- Bid-Ask Quotes:
The at-the-money (ATM) strike is the strike price of the NIFTY option contract just below the forward index level. NIFTY option call contracts with strike prices above the ATM strike and NIFTY option.
What Does India VIX Indicate?
The VIX indicates market volatility and provides valuable insights for various market participants:
- Traders use the VIX to adjust strategies based on changing volatility levels, such as adjusting stop losses or leverage.
- Long-term investors utilize the VIX to manage risk, adjusting hedges like puts in response to increasing volatility.
- Options traders make decisions based on VIX fluctuations, as rising volatility increases option value.
- Trading volatility directly through strategies like buying VIX futures allows investors to benefit from volatility regardless of market direction.
- The VIX shows a clear negative correlation with index movements, aiding in timing market peaks and bottoms.
- Portfolio and mutual fund managers adjust exposure to high or low-beta stocks based on VIX levels to manage risk effectively.
How To Use India VIX for Trading?
Using India VIX for trading involves understanding market volatility and using it as an indicator to make informed decisions.
Here’s how you can utilise it for trading:
- Intraday Traders’ Indicator
India VIX tells day traders if the market is getting more volatile, helping them adjust their strategies to avoid getting caught in sudden price swings.
- Long-term Investors’ Decision-making
For long-term investors, India VIX acts like a warning signal, letting them know when market conditions are getting risky and prompting them to reconsider their investment choices.
- Options Traders’ Tool
They use India VIX to decide whether it’s a good time to buy or sell options.
High VIX levels might encourage buying options to hedge against potential price swings, while low VIX levels might favor selling options to collect premiums.
- Portfolio and Mutual Fund Managers’ Aid
Portfolio managers rely on India VIX to decide when to invest in safer or riskier assets. When the VIX is high, they might lean towards safer options, whereas during calmer times, they might go for higher-risk opportunities to maximize returns.
- Volatility Trading
Traders can directly trade India VIX futures and options contracts to capitalise on expected changes in volatility.
- Market Timing
Traders can use India VIX as a timing tool to gauge the overall market sentiment.
High VIX levels might prompt a more cautious approach, while low VIX levels might signal a more aggressive stance.
Conclusion
India VIX serves as a vital indicator of market volatility and sentiment in the Indian stock market. Calculated from NIFTY 50 index options prices, it reflects the expected volatility over the next 30 days. Traders and investors can use this index to adjust their strategies, and manage risk.
FAQs| India VIX Meaning
It indicates the market’s expectation of volatility over the next 30 days in the NIFTY50 index. A higher VIX suggests higher expected volatility, reflecting increased market uncertainty.
Traders can use India VIX to gauge market sentiment and risk. A lower VIX suggests stable trends and confidence, suitable for trend-following strategies. A higher VIX indicates potential market turbulence, which may affect trading positions and strategies.
India VIX measures expected market volatility based on NIFTY options prices, while NIFTY is an index that tracks the performance of 50 major Indian stocks. Generally, a rising VIX can signal increased market fear, often moving inversely to NIFTY’s direction.
India VIX can be monitored through the NSE website or financial market platforms that provide real-time data. It helps traders to anticipate market volatility and adjust their strategies accordingly.
Source– nseindia.com, nseindia.com, nseindia.com/products-services
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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.