Investors who invest in the funds market are well-aware of market volatility. They also know that it will have a massive impact on their returns. To have a good understanding of the extent of market volatility, you have to quantify it to base your decisions.
Published on 03 February 2023
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But how exactly can you measure market volatility? Well, the India VIX index can be helpful. It's an index to benchmark the market volatility to measure the changes within the volatility aspects. This volatility index functions in the form of a market barometer.
What is India VIX Index?
So, what is India VIX? It's a volatility index that measures the volatility that all traders expect over the next 30 days within the NSE index. Simply put, it's a calculation of price swings, which the investors expect within the market over crucial market news.
When the index value is low, it shows the absence of the fear factor within the market. This means investors have to be a lot more confident when they invest. Besides that, a higher index value is viewed as an increasing fear factor and uncertainty.
Even though India VIX was first introduced back in 2008. But originally, the volatility index appeared back in 1993 at the Chicago exchange. It helped in gauging the presence of fear factors within the market.
What India VIX Index means in the Stock Market?
When it comes to India VIX is viewed as the appellation that is utilized for the volatility index in the NSE. It considers 5 variables for the calculations, which are:
Volatility
Risk-Free Returns
Strike Price
Expiry Date
Stock Market Price
VIX is said to measure the volatility that is expected by all the investors who take the best bid into account. Volatility and VIX function in the opposite direction. When the VIX is higher, it means that the market has high volatility, and when the VIX is lower, the market has low volatility.
To understand India VIX properly, here is an example:
"Let's say the value of VIX is 15. This means the investors will expect the prices to fluctuate within the range of -15 and +15 during the next 30 days.
VIX oscillates between figures 15 and 35. Values that are below or around 15 will represent low volatility.
Apart from that, values that are higher than 35 will show that there is high fluctuation within the market."
Back in the past, both VIX and NIFTY shared a negative relationship. This means that when VIX was below 15, NIFTY used to increase.
But the India VIX within the stock market is said to represent whether or not the investors are feeling complacent and fearful within the short term. This is an indication of the stock market's choppiness.
Calculating the India VIX: Elements That are Considered!
When it comes to calculating the volatility index, there are 4 primary components that are considered. All of these components contain bid-ask, forward index level, interest rates and time of expiry.
To have an excellent understanding of what type of role they play, let's find out through this section:
Time to Expiry: Rather than taking days or weeks to calculate the expiry time, it gets calculated within minutes to obtain the precision level that is expected by all traders.
Interest Rates: It's crucial to consider the risk-free interest rate for the NIFTY for the expiry months of the NIFTY options contract. Besides that, it's also important to consider the tenure rate wished for 30 to 90 in the form of a risk-free interest rate.
Forward Index Level: When it comes to the out-of-cash options contract, it's considered through the volatile index calculation and detected through the forward index level. The at-the-money strike, which helps in choosing the options contract, gets determined through this calculation of India VIX. After that, it's taken into account as a recent available price for all the upcoming NIFTY contracts for the separate expiry dates.
Bid-Ask: The NIFTY option contract's strike price, known as the ATM strike, is available at a lower level when compared to the forward index level. The ask and bid prices for all the options contracts are something that should be taken into consideration when calculating the volatile index.
Final Thoughts
India VIX is known as a volatility index, which helps in measuring the expectation of the market's volatility. It's viewed as a powerful tool that can easily gauge the stock's expected price movement easily and effectively. Moreover, the high VIX values can lead to a shift within the indices and share price.
It also plays an essential part when it comes to picking derivative premiums and contract prices. By now, you're well aware of what exactly India VIX is, and you can proceed further with your trading work with confidence.
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