If you have been an investor in the market for some time you would have come across the term – India VIX. But what is India VIX really telling us and why is it important for traders and investors? Letâs understand.
India’s volatility index for short is called India VIX. It indicates the degree of volatility or fluctuation that traders expect over the next 30 days in the Nifty50 index. India VIX was introduced by the NSE in 2008, but the concept was originally introduced by the Chicago Board Options Exchange in 1993.
The value for India VIX is derived using the Black & Scholes (B&S) model.
India VIX uses five variables – strike price, market price of a stock, expiration time, risk free rate, and volatility. The VIX achieves the volatility traders expect in the market by using the best bid and ask quotes from Nifty out-of-the-money options contracts, present and near the month.
Volatility and VIX value have moved in opposite directions. A higher value of India VIX indicates higher volatility expectations in the Nifty and a lower value of India VIX indicates lower volatility expectations.
Let’s understand with the help of an example:
Suppose the India VIX value is 15. This means that traders expect volatility of 15% for the next 30 days. In other words, traders expect the value of Nifty to be in a range between + 15% and -15% of the current value of Nifty for next year over the next 30 years. days.
Additionally, past trends suggest that there is a negative correlation between Nifty and India VIX. Whenever India VIX drops, the Nifty goes up. And when India VIX goes up, Nifty tends to go down.
Theoretically, the VIX is between 15 and 35. Anything around or below 15 would suggest low volatility, but if it is above 35, we can say that the volatility is high. In the past, the VIX even reached over 50 levels, in 2009, following two superior circuits on the day the
the election results have been announced.
VIX helps to understand whether market participants feel fearful or complacent about the market in the short term. VIX gives a more accurate picture of market instability.