The National Stock Exchange (NSE) launched the India VIX volatility index in 2010 as a niche product in the Indian securities market. The Chicago Board Options Exchange (CBOE) first used the concept of a volatility index, from which the Indian VIX originated.
The high values of VIX reflect the heightened fear of volatility that leads the market; that is why it is also called the fear index. That is why market downfalls are either preceded or immediately followed by a spike in the VIX. On the opposite, when the VIX index is below 15, it implies that the downturn in the market is fundamentally limited.
The three most important aspects of India VIX are the following:
- It tells investors the market behaviour.
- It shows the greed and fear sentiments of the market.
- It describes the market sentiment in terms of volatility.
Many people wrongly assume that VIX can tell if a market will go up or down. But what India VIX means is the volatility of a market. Volatility can be either on the up-side or the downside of the market.
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India VIX - the name itself is self-explanatory in that it is the index of market volatility.
India VIX volatility index
India VIX can help you identify if the market will remain choppy or not. A choppy market is a condition where prices vary rapidly periodically, either towards a downturn market or for an upward movement.
A choppy market can be recognised by rectangular chart patterns where prices fluctuate rapidly, and trade movement seems complicated. This may occur due to the investor’s expectations of a catalyst, or the cost fall due to reactions to new events.
To put forth a simplified definition of this index, we can say that India VIX measures the volatility of NIFTY 50 stocks for the upcoming 30 days in the market. It is calculated based on the buy-sell price of NIFTY options.
Options are the derivative products where the buyer holds a right to execute the ‘option’ of either buying or selling shares at a specific pre-determined price (also known as the strike price) during a pre-determined period.
NIFTY Options are derivative instruments wherein the underlying asset is NIFTY. Like NIFTY 50 Futures, NIFTY Options also have a lot size of seventy-five, different strikes and multiple expiry periods.
Options are derivatives similar to Futures. Unlike Futures contracts, your income/loss does not decrease as NSE NIFTY increases or decreases. Using NIFTY Options, India VIX can also give you an idea of annualised change in NIFTY 50 in the next 30 days.
India VIX Values
You can compare the high, low, and current values of India VIX to get an idea of market volatility.
Low India VIX means low fear
High India VIX means high fear
The fear here is not indicative of a fall in the market. It shows that the market can have volatility which can either be upbound or low bound.
For example, assume that for one year, India VIX has the highest value of 23, the lowest value at around 9, and the current VIX value of 12. By comparing these three values, we can say that the market currently has less “fear” of volatility as the value is closer to the low weight. In such a case, the probability of a choppy market is also less.
VIX and Equity markets
As the above chart displays, there is an inverse relationship between NIFTY and India VIX. Depending on the market, the VIX fear factor is looked for negative volatile connotations. Since low VIX values are associated with long-term market growth, stable VIX growth will follow any market adjustment.
The VIX is an essential indicator for measuring the perception of market risks. A sharp rise in the VIX ascertains that market fluctuations have increased significantly. Usually, this means that the value of NIFTY Options increases, and the volatility forecast rises simultaneously. This could be a good chance for long-term investment experiments on NIFTY stocks.
The historical correlation falls between (-0.80 and -0.85), indicating a strong negative correlation. This can help you trade a popular range for the VIX.
For example, VIX usually attains a minimum value in the range of 10-12. If VIX has remained at this level for a long time, it can indicate an unfavourable fluctuation triggered by political or industry events. In such a case, VIX can rise sharply and NIFTY can sink. It can therefore be a good opportunity for short traders and position holders.
On the other hand, the usual high value of VIX ranges between 26-29. You can use these levels as an indicator of bottoming out of the Nifty, and you can appropriately initiate long positions around these levels.
At its heart, VIX reflects fear, and the market always co-varies negatively with fear. That is the gist of the link between VIX and the NIFTY index. You can check India VIX here on the NSE India website.
