What is India VIX?

India VIX is a volatility index that helps measure the stock market’s volatility – or the expected rate and magnitude of price changes – over the near term. 

India VIX is based on the Nifty Index Option prices and indicates the degree of volatility or price fluctuation traders expect over the next 30 days. India VIX is calculated using five variables – strike price, the market price of a stock, expiry time, risk-free rate, and volatility. 

What is market volatility?

Market volatility is when the market or any marketable security experiences a bout of uncertainty, manifested in the form of unpredictable and incalculable sharp price movements. Prices can either be highly volatile (when the price fluctuates swiftly in a short period) or have low volatility (when prices move slowly or stay relatively stable).

Market volatility is mostly measured for price movements over a specified period. In the case of India VIX, it is measured for a period of 30 calendar days. 

Many things cause or affect market volatility, such as political or economic factors like elections or surprise fiscal announcements. It is not necessary that volatility will always be induced due to bad news. There could also be volatility around positive events like a government returning to power with a majority following elections.

Relation of India VIX and Nifty

India's VIX normally ranges between 12 and 27. A value of 27 or more means that market participants expect sharp price movements. In other words, they perceive the market risk to be high. A value of 12 or lower indicates that traders expect the market to be stable over the next 30 days.

VIX only indicates volatility, it does not indicate the direction the market can move in. When VIX is high, the market can move sharply in both directions. However, historically there has been a negative correlation between Nifty and India VIX. This means, as per historical observations, Nifty gained when India VIX was low while it declined when the index was high. 

Planning trade around VIX 

Since India VIX gives a sense of the market volatility, it makes a useful tool for investing as well as trading. For instance, long-term investors may change their exposure to high-risk sectors as well as their hedge positions based on the India VIX movement. 

There are also futures contracts available based on the index. Traders and funds can trade in India VIX futures on the NSE to hedge the volatility risk to their portfolio or to speculate.

Conclusion

India VIX is a reliable and important measurement of market volatility, helping traders and investors understand the market’s risk perception. India VIX can help market participants tweak their portfolios in response to market volatility. India VIX derivatives can be used to hedge the risk of market volatility or for speculation. Market participants can use India VIX futures to either hedge against volatility or for volatility trading.

FAQ

Q. What is volatility?

Volatility is when a market experiences a period of uncertainty, resulting in unpredictable, sharp price movements.

Q. What is the full form of VIX?

VIX stands for Volatility Index 

Q. What is India VIX?

India VIX is the volatility index of India based on the order book of NIFTY Options.