What is India VIX?
India VIX, short for India Volatility Index, measures the expected market volatility over the next 30 days. Introduced by the National Stock Exchange (NSE) in 2003, it helps investors and traders understand how much the market will likely fluctuate in the near term.
The concept of volatility indices like India VIX originated in 1993 with the Chicago Board Options Exchange. Simply put, India VIX rises when the market is unstable and fluctuates significantly, while it falls when it is calm and stable.
How is India VIX Calculated?
India VIX is not based on stock prices like Nifty or other market indices. Instead, it is derived from the order book of Nifty options contracts using the Black-Scholes model. This model considers:
- Strike Price: The price at which the option can be exercised.
- Market Price: The current price of the Nifty index.
- Time to Expiry: Measured in minutes for precision.
- Risk-Free Interest Rate: Calculated for a tenure of 30-90 days.
- Volatility: The key variable representing market fluctuations.
A higher India VIX value signals higher market volatility, while a lower value indicates less volatility.
Key Elements in India VIX Calculation
- Time to Expiry: Calculated in minutes for accuracy.
- Interest Rates: Risk-free interest rates for 30-90 days are used.
- Forward Index Level: Determines the "at-the-money" strike price.
- Bid-Ask Prices: These are utilised from options contracts to determine the index.
Applications of India VIX
India VIX serves as an essential resource for diverse market participants:
- Day Traders:
- Monitors short-term market fluctuations.
- It aids in managing stop losses and modifying leverage in times of increased volatility.
- Long-Term Investors:
- Assesses risk due to market-to-market (MTM) losses.
- Aids in planning strategic investments during volatile phases.
- Options Traders:
- High volatility benefits option buyers.
- Low volatility favours option sellers.
- Portfolio Managers and Mutual Fund Managers:
- Guides decisions on investing in high-beta or low-beta stocks.
- Optimises portfolio allocation based on market conditions.
Relation Between India VIX and Nifty
- The Nifty is a market index that tracks fluctuations in stock prices.
- On the other hand, the India VIX measures market volatility.
These two exhibit a negative correlation:
- When India VIX rises, Nifty tends to fall due to increased uncertainty.
- When India's VIX falls, Nifty often rises as confidence in market stability grows.
Benefits of India VIX
- It helps traders and investors understand upcoming market trends.
- Allows traders to adjust strategies based on volatility levels.
- Guides portfolio managers and mutual fund investors to plan investments
- Supports smarter investment decisions during uncertain market conditions.
Key Takeaways
- Increased Volatility Monitoring: Traders increasingly use India VIX to assess risks during market turbulence.
- Digital Tools for VIX Analysis: New platforms offer real-time India VIX insights to help retail investors.
- Global Influence: India VIX trends are closely linked with global volatility indices for better market predictions.
- Educational Campaigns: Financial platforms are simplifying India VIX concepts for beginner investors.
