Published : April 5, 2019
India VIX is the indication of investor’s perception of the market’s volatility in the near term. This portrays the expected volatility of the market over the next 30 calendar days. Thus, India’s volatility index or the India VIX is the key measure of market expectations of near term volatility of Nifty stock index option prices.
As a matter of fact, technically, you can compute VIX on the basis of the order book of Nifty options. For this, there is a utilization of best bid-ask quotes of near as well as next month NIFTY options contracts. These are basically traded on the F&O segment of NSE. The process goes on like this, the higher the India VIX values, higher will be the expectation of volatility and vice-versa.
A few lines about volatility index history. Originally the VIX is – a trademark of Chicago Board Options Exchange (CBOE). They introduce the volatility as an asset class in the form of an index in 1993. After this, they also launch the VIX derivative future and option trading in 2004. In India, the NSE launches the VIX in 2008. They further introduce the NVIX futures in 2014 for trading.
We should not get confused with the market index because it is totally different. The market index is the measurement of the direction of the market while the volatility index measures the volatility of the market. The calculation is also different such as, market index is calculated by the price movement of the market whereas VIX is calculated by making use of order book of the underlying index’s options.
There is parallelism among volatility and the value of India VIX. With Nifty there is a strong negative correlation with India VIX. The number of times India VIX falls, Nifty rises and also Nifty falls when India Vix rises. If we see historical data, India VIX floats to peak a few days before NIFTY touches the bottom post-Lehman crisis.
The following are the advantages of volatility index for a trader or investor –
The very concept of volatility index in India is constantly evolving. Currently, as a trader/investor in the stock market in India, you may experience any of the following or all as a disadvantage of using volatility index as a measure of volatility in the market:-
Here will show up the usefulness of India VIX from the traders and investors point of view. Traders now have volatility index as an instrument to earn more from such an occurrence. Basically, volatility is independently known as the measure of change. The higher value of volatility shows the rapid change in prices as compared to the immediate past. The following are the benefits to traders and investors –
In simple words, the volatility index is a hedging instrument through which the investors can minimize the risk fluctuations. Currently, NSE calculates the value of an index based on the option prices. Or to elaborate, you can calculate it by order book of the nifty options. The instrument used to offload the risk can be like if the investor has the portfolio more likely as the Nifty index. Thus, volatility is the measure of risk or uncertainty of prices.
For instance, there are chances that events like election result or major policy announcement will broadly affect the prices. This usually results in a lot of upside and downside price movement of both shares and indices. Therefore, the investors can move towards volatility index for buying it. This would also help the investor in minimizing the risk.
This is the time or the situation where one can experience the higher price of the index. So, if the value of the portfolio of the investor falls then the investor will get balanced with the amount one earns from the increase in VIX. The foremost feature is that unlike other hedging instruments it never cuts earnings that the investor receives from the original portfolio. The investors earn an original portfolio that they own when the prices rise up. In addition to this, the investor will VIX price appreciation as a bonus.
So if you are looking to benefit from market volatility, you can start stocks trading with us along with trading in India VIX.
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