India VIX is probably the most unique broad market index on the NSE. India VIX indicates market volatility rather than showing the performance of a segment or the entire stock market. Thus, even the formula for calculating India VIX differs from the other broad market indices. India VIX index (introduced in 2008) is tracked closely by traders and investors, who take notice of movements and consider their positions accordingly in case of a volatile market.
This article explores what India VIX is, why it is important, how it is calculated and what are the implications of changes in India VIX.
What is India VIX (India Volatility Index)?
Volatility measures the rate of fluctuations in a security’s price or a market index’s value. A volatility index is meant to measure the volatility in a particular market. Typically, high volatility indicates high risk, and low volatility indicates low risk.
India VIX is a volatility index that indicates the degree of volatility or fluctuations expected in NIFTY 50 in the next 30 days by traders.
Why is India VIX important?
India VIX is closely monitored by investors with high equity exposure. It is often referred to as the ‘fear index’. India VIX’s importance can be seen in its relationships with market volatility and NIFTY. It has been observed that India VIX correlates positively with market volatility and has a strong negative correlation with NIFTY. Due to this, when India VIX rises, investors might expect markets to fall.
How is India VIX calculated?
India VIX is calculated using the same methodology as CBOE’s VIX, with suitable amendments to adapt to the NIFTY options book.
The mathematical equation used for the calculation of India VIX is called the Black and Scholes model (B & S). The Black and Scholes model (B & S) estimates the theoretical value of derivatives based on other instruments and considers the impact of time and other risk factors.
In India VIX’s calculation, the following elements are considered:
- Time to expiry
- Interest rate
- Forward index level
- Bid-ask quotes
The formula for calculating India VIX:
|σ||India VIX 100|
|T||Time to expiration|
|Ki||Strike price of the ith out-of-the-money option; a call if Ki > F and a put if Ki < F|
|ΔKi||Interval between strike prices- half the distance between the strike on either side of Ki: ΔKi = (Ki+1 – Ki-1)/2|
|R||Risk-free interest rate to expiration|
|Q(Ki)||Midpoint of the bid-ask quote for each option contract with strike Ki|
|F||Forward index taken as the latest available price of NIFTY future contract of the corresponding expiry|
|K0||First strike below the forward index level, F|
(Note: Δ for the lowest strike is simply the difference between the lowest strike and the next higher strike. Likewise, Δ for the highest strike is the difference between the highest strike and the next lower strike)
If you are interested in truly understanding the math behind India VIX, you should refer to this white paper by NSE.
How to interpret rises and falls in India VIX?
In the Indian stock market, India VIX is an indicator of market risk. A low India VIX is an indication that traders expect the stock prices to remain stable in the next 30 days. Stable stock prices mean you would be able to buy or sell a stock at a price close to the current price in the future.
A high India VIX is usually an indication that traders expect the range of stock prices to widen in the next 30 days. When the range of stock prices is high, it adversely affects investor confidence in equities.
India VIX historical data
(From 26th July 2010 to 20th April 2022)
Before the pandemic, India VIX stayed below 30. India VIX was the highest ever in March 2020 due to the effects of the COVID-19 pandemic. On 27th March 2020, India VIX was 70.39. It is believed that this spike has represented the expected fall in stock prices back then.
How traders and investors can use India VIX data?
How to use India VIX data for Investing
India VIX measures volatility for the next 30 days. So, investors with a long term perspective who do not need to pay attention to short term price fluctuations are less affected by movements in India VIX. Day to day movements in India VIX might not affect the profitability of long term investments.
However, if the volatility index is rising even in the long term, it may be a cause for concern. When India VIX rises even in the long term, it is seen as a sign of rising uncertainties.
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How to use India VIX data for trading
For traders in options, India VIX is a valuable tool. Options are tools that let you buy or sell a particular security in the future at a pre-decided price. When volatility is rising, options become more valuable. So, an options trader may pay close attention to fluctuations in India VIX.
Even for stock traders, India VIX is a valuable tool. When volatility rises, there is a chance that the stop losses of stock traders will get triggered quickly. This is because prices may move very sharply in periods of high volatility. So, they may need to adjust their stop losses according to the change in volatility.
Can you invest in India VIX? Can you trade in India VIX?
NSE offers futures on India VIX. The trading symbol for the futures is INDIAVIX. All members of the NSE F&O (futures and options) section can transact in INDIAVIX futures.
India VIX gives valuable insights into market volatility. For traders, it is crucial to catch changes in market volatility and adjust their strategies accordingly. While short-term changes in volatility might not affect the profitability of long-term investments, if volatility increases in the long term, they might need to reevaluate their equity investments.
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VIX is a volatility index introduced by the Chicago Board Options Exchange (CBOE) in 1993. It reflects investors’ expectations about the volatility in the US markets in the next 30 days.
When India VIX is high, traders expect the range of stock prices to widen. This is seen as a sign of increased uncertainty in stock prices.
India VIX is a volatility index, and it has a positive correlation with volatility. So, when India VIX goes down, it indicates that the expected volatility has gone down.
India VIX typically has a desired range of 15 to 35, so any value above 35 signifies high volatility. In contrast, any value below 15 signifies low volatility.