India VIX Meaning - What is India VIX or India Volatile Index?

India VIX (Volatility Index) measures the volatility of India's stock market expected in the next 30 days. The volatility is measured on a real-time basis and calculated based on the traders' anticipation reflected in the prices of the Nifty 50 index options. The India Volatility Index captures the investor sentiments in the stock market, which shows the level of fear or confidence in the market over the next 30 calendar days. A higher India VIX indicates greater predicted uncertainty, while a lower India VIX reflects stability and investor confidence.

The Chicago Board of Options Exchange (CBOE) was the first to introduce the volatility index for the US markets in 1993 based on S&P 100 Index option prices. The National Stock Exchange of India (NSE) launched India VIX in 2008, which computes the volatility Index of the Indian stock market based on the order book of NIFTY Options. India VIX works as a weather forecast of the stock market that helps investors gauge how risky or calm the market might be. This allows investors to make investment and trading decisions more cautiously and confidently. For example, during the COVID-19 pandemic in March 2020, the India VIX spiked above 50, reflecting extreme market panic and uncertainty.

Why is India VIX Important for Investors and Traders?

India VIX is a risk analysis tool used by investors to make decisions and provides valuable information in the market. Investors who take the risk of investing in high-beta stocks consider India VIX to measure risk, fear, and stress before they make an investment.

• Analysing market situations A high India VIX indicates increased volatility in the market, and a low India VIX indicates a steadier market with normal up-and-down price movements.

• Investment Decisions Investors anticipate the market's performance in the next 30 days and cleverly choose high-beta stocks.

• To Beware of Market Downfall Increased volatility indicates a falling stock price. By observing India VIX, investors or traders can make decisions regarding stock trading.

• Asset Allocation Asset Allocation is considered one of the most influential factors when determining the returns of an investment portfolio. India VIX allows investors to make strategies for asset allocation.

What is the Normal Range of India VIX?

During periods of economic stability, the India VIX may hover around 15 to 35, signifying calm market conditions. A range of 15 to 35 is considered to be a normal range, suggesting a stable market in near term with a moderate level of volatility. A India VIX value near or lower than 15 indicates extremely low volatility where investors are overly confident. A value above 35 indicates a highly volatile market or high risk.

How to Interpret the Rise and Fall of India VIX?

A rise in India VIX can be interpreted as an increase in market volatility, leading to more ups and downs. This heightened uncertainty often causes market fear, which may result in falling stock prices. On the other hand, a fall in the India VIX suggests lower volatility, which boosts investor confidence. With greater market stability, stock prices are more likely to rise. Generally, a rising India VIX signals a more optimistic market.

How is India VIX Calculated?

India VIX adapts the CBOE's computing technique, with necessary modifications, to the NIFTY options order book. The India VIX is the square root of the weighted sum of the implied volatilities of different Nifty options, adjusted for time to expiry. The result is then annualised. The final result gives the expected volatility, expressed as a percentage.

India VIX = 100 * √((Sum[Weighted Implied Volatility Squared])/Total Weight)

Here's a simplified explanation of the steps involved in calculating the India VIX:

Step 1: Collect data of Nifty 50 index options (both call and put options) expiring in the next 30-day calendar period. For India VIX calculation, the focus is on the out-of-the-money call and put options as they give an idea of future market fluctuations.

Step 2: Calculate the weighted average of implied volatility for all selected options using the price and the Black-Scholes formula.

Step 3: Calculate the forward price of Nifty for the selected expiration date using the call and put options prices. For the India VIX, the expiration time is generally 30 calendar days.

Step 4: The individual implied volatilities of the call and put options are then weighted based on the strike prices and time to expiration. Options with strike prices closer to the spot price of Nifty will have higher weights.

Step 5: Sum up these weighted implied volatilities and take the square root to get volatility as the standard deviation.

Step 6: Multiply the volatility (standard deviation) value by 100 to get the India VIX index value.

Factors Influencing India VIX

India VIX is influenced by various factors, such as changes in economic data, global events, corporate earnings, and the market.

• Economic changes: Economic changes, such as GDP, inflation, interest rates, and consumer spending patterns, have a significant influence on India VIX. Unexpected changes can trigger volatility and cause higher India VIX.

• Global Events: Global events like geopolitical tension, trade wars, cold wars, natural disasters, and tensions between nations can have a huge impact on volatility changes.

• Corporate Earnings: Companies must be listed in the stock exchange to have trading activities in the stock exchange, so the earnings of these companies also lead to changes in volatility.

• Interest Rate: Risk-free interest rates are determined for NIFTY option contracts, and these rates depend on the contract's expiration month. Changes in interest rates directly affect volatility.

• Market changes: Investors may sell or buy financial assets based on uncertain rumors, which leads to increased activity in buying and selling financial instruments, leading to increased volatility.

• Options trading activity: The level of options trading activity may lead to volatility changes in the market.

How Are India VIX and Nifty Related?

India VIX and Nifty have a close connection. India VIX is a measure of the volatility in the Indian stock market which is calculated based on Nifty 50 index options in the next 30 calendar days. Whereas, the Nifty 50 is a stock market index that indicates the performance of the top 50 companies listed in the Indian Stock Market.

When India VIX goes up, it means investors expect more volatility in the market in the near future. This negatively affects the market sentiments and usually leads to fall in the Nifty 50 prices. Whereas, when India VIX goes down, it reflects that the investors are more confident about the market stability in the near future and expect lesser price swings. In this scenario, investors tend to purchase the stocks leading to rise in the Nifty 50.

How to Use India VIX for Trading?

Traders can use India VIX as a tool to gauge market volatility and adjust their strategies accordingly.

• Identify Market Sentiment: A high India VIX means there is a market fear which suggests potential downturns. Traders might gauge this market sentiment and hedge their positions. They may buy put options, or short stocks to protect against downside risk. On the contrary, a low India VIX that signals market stability allows traders to take long positions or buy call options in the expectations of continued growth.

• Options Trading: When the India VIX is high, option premiums are expensive. Traders can take advantage by selling options. When the India VIX is low, option premiums are cheaper, so traders might look to buy options, anticipating a future increase in volatility.

• Volatility Breakouts: When there is a sharp spike in India VIX helps the traders to prepare for potential volatility breakouts by using strategies like straddles (buying both call and put options).

• Risk Management: In high India VIX conditions, traders may reduce position sizes and use tighter stop losses, while in low India VIX conditions, they may take larger positions with less concern for short-term fluctuations.

Overall, monitoring India VIX helps traders make informed decisions based on market risk.

Frequently Asked Questions (FAQ's)

What is the indication of India VIX?

The India VIX is a real-time market indicator that indicates the market's expected volatility in the next 30 days.

Do changes in the India VIX affect stock prices?

Yes, changes in the India VIX affect stock prices. When the India VIX rises, it leads to increased market volatility. A decrease in the India VIX leads to a steady market, which has a positive effect on stocks.

What is the normal range of India VIX?

The India VIX normally ranges around 15 to 35.

What is the indication of low India VIX?

The low India VIX indicates stability and investors' confidence in the market, and at this time, NIFTY tends to be at a higher level.

What is the meaning of higher India VIX?

A high India VIX means the market is at risk and uncertain, experiencing fear of price fluctuations.

Can India VIX range come to zero?

No, India VIX cannot go to zero. Historically, India VIX has stayed above nine.

What is the abbreviation of VIX?

VIX is an abbreviation for Volatility Index.