If you have been a market investor for some time, you would have come across the term - India VIX. But what does India VIX really tell us and why is it important for traders and investors? Let's understand.
The India Volatility Index in short is termed India VIX. It indicates the degree of volatility or fluctuation 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 Chicago Board Options Exchange in 1993.
The value for India VIX is derived by using the Black & Scholes (B&S) Model.
The India VIX uses five variables – strike price, the market price of a stock, time to expiry, the risk-free rate, and volatility. The VIX arrives at the volatility expected by the traders in the market by using the best bid and ask quotes of the out of the money, present and near-month Nifty option contracts.
The 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 using an example:
Say the India VIX value is 15. This means that the traders expect 15 per cent volatility for the next 30 days. In other words, traders expect the value of the Nifty to be in a range between +15 per cent and -15 per cent from the current Nifty value for the next year over the next 30 days.
Further, past trends suggest that there is a negative correlation between Nifty and India VIX. Every time India VIX falls, the Nifty rises. And when India VIX rises, Nifty tends to fall.
Theoretically, VIX ranges between 15 and 35. Anything around or below 15 would suggest low volatility but if it is above 35, we can say volatility is high. In the past VIX even spiked to 50+ levels, in 2009, when following two upper circuits on the day the
election results were announced.
VIX helps understand if market participants are feeling fearful or complacent about the market in the near term. VIX gives a fairer idea about choppiness in the market.