logo
Blog Financial Calculators Stock Market Courses Membership शेअर मार्केट मराठी Other Courses Login

India VIX



Understanding India VIX

Let’s assume that you hate watching Horror movies. It might be because you don’t like those creepy characters, you don’t like the suddenness of the scary elements, or maybe because the fear induces your anxiety. It can be anything! 

But what if there’s a disclaimer or a warning flash – “Scary scene ahead!” every time. Would you be more comfortable watching the movie now? Why not, right? You can always prepare yourself before the scene comes up. I am aware that the whole fun factor of a horror movie would be ruined because of these warnings, but it would convince our friends to watch it with us, isn’t it?

India VIX is something similar to this warning flash. Intrigued? Keep reading to find out more...

What is VIX?
VIX is the short form for ‘Volatility Index’. I am sure after hearing the word ‘Volatility’, you can connect this concept with our warning flash from the movie. VIX is the expected annual volatility in the market, over the next 30 days. It is often termed the ‘Fear Index’ because it represents the level of fear, stress, or risk in the market. It is computed based on the bid-ask quotes for options contracts of a Market Index and is expressed in percentage. Now you will ask me, “Ma’am, all this is fine, but where did this VIX come from?”

VIX was created in 1993 by Chicago Board Options Exchange (CBOE), hence it is popularly known as CBOE VIX. It is based on options contracts of the S&P 500 Index for the next 30 days. NSE took inspiration from this and started their very own India VIX.

What is India VIX?

‘India Volatility Index’ was introduced by NSE in 2008. It is an Index representing expected annual volatility in Nifty50 over the next 30 days. It being a leading indicator simply reflects investors' sentiment about the market. Just like CBOE VIX is based on S&P 500 options contracts, India VIX is based on Nifty 50 option contracts for the next 30 days. If the VIX is rising, it means that the market is expecting higher volatility ahead and vice-versa. The ideal range is between 15%-35%. The computation for India VIX remains the same as CBOE VIX.


How to interpret India VIX?
Let’s understand this with an example. Say, today India VIX is at 20% and Nifty ended at 14,500. This means that based on Nifty50 option contracts for the next 30 days, the expected annual volatility is 20% on the upside OR the downside.
Hence, the annual expected downside would come up to 14,500 – (20%* 14,500) = 11,600. And the annual expected upside would come up to 14,500 + (20% * 14,500) = 17,400. Therefore, the expected range for Nifty50 for next year from today would be between 11,600 to 17,400.

Nifty 50 and India VIX

The chart given below reflects the Nifty price and India VIX for the past 8 years. Nifty50 and India VIX share a strong negative correlation which is evident from the chart. When VIX goes up, Nifty goes down and vice versa.

Exactly a year ago, when the Government had declared an outbreak of COVID-19 in the country, VIX was around a whopping 84%. On the other hand, Nifty was around 7,600 on the same day. Cut to today, after an ease in lockdown restrictions and swift vaccine roll-out, VIX is around 20.65% and Nifty is at 14,507. We can see the positive effect of ease in lockdown restrictions from June 2020 being reflected in VIX as it came back in its ideal range with a strong bullish movement in Nifty.

   

Conclusion:

India VIX plays a vital role in conveying the investor's confidence in the market. One must keep a note of the following:

  1. VIX is the “expected” volatility in the market for “next year”.
  2. Apart from this, it is calculated for an Index and not a stock.
  3. It is a leading indicator that can help intraday and swing traders by reflecting perceived market direction based on volatility.
  4. And most important, VIX does not indicate a market direction, it indicates market volatility.

 USE COUPON: WEEKENDSPCL For Exciting DISCOUNT ON ALL COURSES