The Indian Stock Market is volatile right now. It is expected to be volatile throughout the year 2021. That leads to two different approaches. You can either cower in fear or you can be emboldened and invest anyway, believing that there is still potential on the horizon.
No matter what approach you choose, India VIX is turning heads and making people talk.
What is India VIX?
India VIX is the India Volatility Index. It provides a quantitative value to the volatility anticipated in the Indian Stock Market in the short term.
The short term assumed here is considering the next 30 days.
Lower the India VIX values, lower the expected volatility and vice versa.
Sounds interesting? Let us explore it further.
So do you want to know where the term VIX came from? Chicago Board Options Exchange or in short CBOE invented it 1993. CBOE granted permission for its usage to the NSE, and there you have it. The India VIX came about only a few years ago.
India VIX Calculation
The Black-Scholes Model is where the VIX calculation actually comes from. Now, not to confuse you, but there’s a serious amount of math involved in this calculation. Thankfully it is not needed as it is not the important part.
You just need to know the basics of this calculation which is as follows:
The India VIX Calculation involves both the current month and next month, Out of the Money (OTM) options. Both In The Money (ITM) and At The Money (ITM) are not considered. The India Vix is calculated on the basis of the bid and ask price of these OTM options.
What is of interest to traders and investors is that the VIX can predict the volatility expected in the market.
India VIX Example
For example, if India VIX is 14.2, this depicts a probable annual variation of 14.2% in the Nifty over the next 30 days.
So, the value of Nifty is expected to be in a range between +14.2% and -14.2% from the present price of Nifty for the next 1 year for the next 30 days.
So if Nifty is presently at 10000 the expected range of Nifty for 1 year is between 10142 and 9858. Where 9858 is the lower end and 10142 is the upper end.
But that’s not all, you also calculate the expected volatility of the Nifty for an even shorter time frame using the India Vix.
The formula for that is VIX divided by the square root of T. If you want the volatility for “x” days then T would be “365/x”.
So for example, if you want to calculate the expected range of Nifty for one month then T would be 365/30 which is approximately 12. Based on the value of India VIX which was taken above 14.2, the expected variation in Nifty for the month would be 14.2/Square Root(12) = 4.1 %.
This information is extremely valuable for Nifty Options traders as you can sell options above and below this range and make money.
India VIX vs Nifty
From the chart you can observe the following India VIX interpretation :
[li]An inverse relation between Nifty and India VIX, India VIX goes down when the Nifty goes upwards and vice versa.[/li]
[li]India VIX at high levels implies a market expectation of large volatility in Nifty and vice versa.[/li]
[li]India VIX is considered low if it is below 13 and high if it is above 17 and, so the normal range is considered between 11 & 18.[/li]
Between 11 to 13, India Vix is considered to be in the lower range. Between 17 to 18, India Vix is considered to be in the upper range. The median range is 14-15.
How to use India VIX?
India VIX is low when there is no big trigger in the market for movement. If there is an expectation of a big event like national elections then the India VIX climbs up. The movement can be based on good news or bad news.
VIX always tries to move towards its median value, so you need to look at extremes in the India VIX, extremes in put-call ratio and extremes in open interest.
You can go long on the Nifty and/or its components when the India Vix is at its lower extreme and similarly go short when the India Vix is at its higher extreme.
India VIX Google Finance
India VIX live chart and historical data are very well available on Google Finance.
The symbol for it on Google Finance is NSE:INDIAVIX. You can use this link India VIX Google Finance to check the news, days range, 52 week high low and volume about the index.
Trading in India VIX
India VIX Futures
Just like NIFTY, India VIX is an index and you can only use derivative (F&O) contracts to trade on them. So to trade in India VIX you need to trade in India VIX Futures. It can be mainly used to diversify your portfolio as well as for volatility trading.
Symbol of the Underlying – INDIAVIX
Expiry date – Every Tuesday of the Week.
Contract cycle – Weekly – 3 contracts per week.
India Vix Lot size – 900
Quotation Price – India VIX Index * 100
Price steps for contracts – 0.25
Base Price – Daily Settlement Price of the contract.
Settlement price – Closing Price of the underlying India VIX index
Settlement procedure – Cash
Normal Trading Hours – Mon-Fri 9:15 AM to 03:30 PM
Conclusion: India Vix – Everything you should know
Trading in India Vix Futures is out of favour of the traders and investors in the Indian Stock Market. It is not much popular among the retail investors especially because liquidity is a problem and a persistent trader can end up incurring impact cost (slippage)
What is of interest to traders and investors is that the India VIX can predict the volatility expected in the market.
Ultimately, the VIX is going to tell you how much fear there is in the market, and also complacency.
The India VIX is a good indication of when things are going to plummet or stay strong. Being able to see ahead to the next thirty days is a huge boost for traders. The VIX gives you an accurate indication of what’s going to happen in the Nifty50 this coming month.
Keep in mind that the India VIX rating shows that it could move in either direction by that amount. If you know that that kind of move is not too serious at all you can trade confidently.
Not only does the VIX tell you a lot about what’s happening right now, but it also lets you look at the past.
You can compare the current value to the 52 week high and low of the values and then make your trading decision. If it is closer to the lower band then you can expect a huge rally coming up in Nifty soon and similarly, you can exit your positions if the value is touching the upper band.
You can form numerous trading strategies based on the India VIX, the sky is the limit here.
The India VIX is seriously benign in nature and that’s why you need to have it on your radar. What happens when traders are complacent for too long? Fear is on the horizon.
Checking the VIX is a great way to see the sentiment of the market and where things are inevitably headed.
Do we have a choppy market on the horizon? The VIX is going to tell you just that.
So, in essence, VIX is a great tool. It’s a tool that you should seriously be using. As an investor, the greatest power that you have is foresight, and the India VIX provides you with just that.
But it’s not just about understanding the market as it is today, it’s also about predicting where it’s going in the future. Of course, if everyone could predict the markets then everybody would be millionaires, but at least a tool like the VIX can help you to make sound decisions.
If you enjoyed this blog post, do share it with your friends and family because sharing is caring 🙂 !
As an Amazon Associate, I earn from qualifying purchases.
Stocks Fetcher (stocksfetcher.com) is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com and it’s affiliated sites.