India Volatility Index better known as India VIX is used by investors in their decision-making process regarding portfolio management and trading strategies. Let us know more about the India VIX.
Imagine you are a fisherman. You are ready to enter into the sea to catch fish. But before going, you want to know about the weather forecast. It could be a rough sail in case of any storms or a smooth sail with less turbulent waters. It is easier if you know what to expect.
Impact on the Stock Market
The VIX is a real-time market index representing the stock market expectations of fluctuations. A higher VIX value signals an investor about significant changes in the market based on political, economic, or other major events.
What is a Volatility Index?
Similarly, the India Volatility Index (VIX) indicates investors about whether they should take risk or be cautious. It measures the market’s expectation of volatility over the next 30 calendar days. A high VIX value indicates a higher expected volatility in the market. Thus, there is uncertainty or fear in the market. That is why it is often referred to as the “fear index” of the stock market.
Volatility is how fast stock prices change. It is a way to gauge market sentiment, and in particular the degree of fear among the market participants, mainly the investors and traders.
This volatility index has been inspired by the Chicago Board Options Exchange (CBOE). CBOE is a USA stocks and commodities exchange where futures and options contracts are traded. So, if the VIX is lower, traders mark lower premiums on their options. This is because they are more confident about the market.
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Active investing is like the hare’s side of this story. The fund manager is responsible for stock picking based on market trends and instincts. The fund manager (the hare in our story) is confident that they can outperform the market. Given their professional skill and market knowledge, they should. However, the data says otherwise.
Relationship between India VIX and NIFTY
Historical data suggests that India VIX and NIFTY have an inverse relationship over short periods. This is based on the market sentiment of the investors. High volatility index is used by investors as a hedge against potential drawdown. This helps them manage their investments by protecting them during market storms and capitalising on the calm.
Some investors also use this index for their hedging strategies. They also use this as a potential buying opportunity, waiting for panic in the market for the stock prices to go up.
Impact on Investors
Assuming the index is at 30 (i.e., a higher VIX), the investors would want to consider buying put options to profit from a potential market drop. During higher fluctuations, the premium on options is higher due to the market uncertainty.
India VIX and General Elections
India VIX today (NIFTY VIX) closed at 20.55% (*insert closing rate*) (as of May 13, 2024). Since the last six months, this index has been ranging between 11-16%. But in May 2024, NIFTY VIX increased by 52.78% as of today.
National Stock Exchange’s data from the 2014 and 2019 general elections show that during peak election dates the India volatility index skyrocketed close to 38.
Investors can use this index for risk management, timing the market, hedging, diversification and even speculation. While a higher VIX will help you time your stock prices, a lower VIX indicates stability in the stock market. All this will help you, as an investor to adjust your portfolio risk.
FAQS
What is the full form of VIX?
VIX stands for Volatility Index. It is a measure of a market’s volatility, calculated from options prices such as the NIFTY VIX. The VIX reflects the market’s expectation of the 30-day implied volatility of the market.
How to calculate VIX?
The VIX is calculated by examining the prices of options on a stock index, reflecting market predictions of near-term volatility. Prices of both call and sell options are considered, particularly those close to the current market level. Higher option prices indicate greater expected volatility. The VIX turns these prices into a percentage that predicts the range within which the index is expected to move in the next 30 days.
How to read India VIX?
The India VIX value is expressed as a percentage and reflects the expected annualised change in the NIFTY 50 over the next 30 days, based on options trading.
For example, a VIX of 15% suggests the market expects the NIFTY to move up or down by 15% over the next year. A high VIX value (e.g., above 20%) indicates that traders expect significant volatility, often due to uncertainty or pending economic events. This is often seen as a sign of fear or stress in the market.
Conversely, a low VIX value (e.g., below 15%) suggests that traders expect less volatility, reflecting stability in the market.
Who calculates India VIX?
The India VIX is calculated by the National Stock Exchange of India (NSE). It is based on options prices of NIFTY Index options traded on the NSE.
How to use VIX in trading?
You can use VIX as a proxy for market risk. To use VIX in trading, you can buy and sell VIX futures contracts on the National Stock Exchange (NSE). You can also use VIX as a hedging tool in your portfolio. A high VIX value can indicate increased market volatility, while a low value suggests a more calm market.
What if India VIX is low?
India VIX is a measure of the country’s stock market volatility. If the VIX is low, it suggests that the market is stable and expecting minimal price movements. This could be due to a variety of factors, including strong economic growth, positive corporate earnings reports, and a favourable political and policy environment.
Is a high VIX bullish or bearish?
A high VIX can indicate market uncertainty or fear, which can be bearish for stocks. However, a high VIX can also signal a potential buying opportunity, as investors may be more likely to buy stocks when they expect volatility.
Does India VIX affect Bank Nifty?
Yes, VIX can affect the Bank Nifty index. The India VIX measures the level of volatility in the Indian stock market and can be influenced by various factors such as economic conditions, political events, and market sentiment. If the India VIX increases, it can indicate higher market volatility, which can potentially affect the performance of the Bank Nifty index, which is made up of the stocks of major Indian banks.
Can VIX go to zero?
While the VIX can reach very high levels during periods of market stress, such as the 2008 financial crisis or the COVID-19 pandemic, it is extremely unlikely to ever reach zero. This is because the VIX is derived from option prices, which always have some degree of inherent volatility.
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