What is India Vix?

Nowadays, India VIX is known as NIFTY VIX. So what is interesting about this India Vix? First, we will discuss the India Vix and also discuss it in full brief in this blog. VIX stands for Volatility Index, a crucial metric measuring the volatility and investor sentiment in the Indian stock market. It represents the volatility in the NIFTY 50 index over the next 30 days. This was introduced in 2003 by the NSE.

About India VIX

The India VIX is a meter of market volatility; higher VIX values indicate more volatility, while lower VIX values indicate less volatility.

It is calculated by the NSE from the order book of the NIFTY option, so the best bid-ask for quotes of near and the next month's NIFT option which contracts the treaded on the NSE F&O segments that are used for this. 

This index reflects investors' perceptions of market volatility in the near term, that is it portrays market volatility over the next 30 calendar days. So the higher the India VIX number, the greater the predicted volatility.

Real-world Example of India VIX in Action

Here are some real-world examples in action:

How is India VIX Calculated?

So it is essential to note that the India VIX, or the volatility index is influenced by four key factors:

• Expire time: The time frame is calculated in minutes, to ensure the precision in the forecasting market volatility. So the time remaining until the option of contracts expires is crucial for accurate predictions.
• Interest Rate: Here the factor considers the prevailing tenure rates over the next 30-90 days, and these rates depend on the contract expiration month. There is a risk-free interest rate which is determined by the NIFTY option contacts.
• Forward Index Level: So it sets the strike price for the options contract that reflects the current prices of NIFTY future contracts for their respective expiration dates, and it sets the strike prices for the options contract that reflects the current prices. So this factor determines which out-of-the-money option contract should be utilized in the calculation.
• Bid-Ask Prices: These prices are crucial inputs for assessing market volatility. So in the calculation of India VIX, both bid and ask prices for the option contract are considered. So the NIFTY option can be bought at strike prices below the forward index levels.

Formula

Here is the formula:

India VIX =  100 * √{(Sum (Weighted Implied Volatility Squared) /  Total Weight} 

Where, 

• Sum [Weighted Implied Volatility Squared]: this represents the summation of the squared implied volatility, which is each multiple by their respective weight.
• Total weight: This represents the sum of the open interest values of all the options that are considered in the Indian VIX calculation.

Historical Information

So the volatility usually rises ahead of big events, such as a union budget or election results. And this is because the investors are in a phase of wait-and-watch mode. But the interesting part of this is that the Indian election is underway and the Indian VIX recently fell 20% the most in 5 years. 

So the market gurus feel that this steep fall in the volatility index is because the current government is expected to come back to power and hence there is a sense of stability. The last time VIX declined by 34 % was in 2014, and in 2019 it dropped by 30%. 

Both times it happened on the day of the Lok Sabha election advance, so the VIX percentage can still inch higher. So for just a disclaimer, unlike in the US, the VIX is not traded in India. As a result, the India VIX only has national significance.

Historical Data of India VIX

Key historical events and their impact on India VIX values:

Fun Fact About India VIX

Here are some fun facts which you have to know about India VIX:

• Birth Year: It was introduced in 2008, inspired by the CBOE VIX in the U.S, Means timing coincided with one volatile period in the global finance market.
• The Fear Gauge: The nickname is Fear Gauge because it measures the market volatility and investors' nervousness.
• Inverse relationship with the market: This has a peculiar effect on the stock market, as it moves inversely to the NIFTY 50.

• The Predictive powers: The traders consider the India VIX to have mystical predictive powers. So it is like a signal for smoother trading waters whenever it calms down.
• Tied to Election: The election years in India have a signature impact on VIX. For example, they hit the peak in 2014 and  2019 but they claimed immediately after this.
• Spiker and tumble: here the index has seen some moments, at the time of the COVID-19 pandemic in March 202 and then plunging to the historical times of perceived stability.

Why is India VIX Important?

It is a reliable indicator for investors across various segments. So for industry traders, this informs about the market volatility, determines the stop-loss level, and aids in risk assessment. Here the long-term investor utilises this to get through the potential losses and make informed investment decisions.

Moreover, options traders find invaluable information in deciding, whether to buy or sell the option based on the market volatility. So mutual fund and portfolio managers use their insights to optimize their investment strategies, and low-beta stocks, and choose between high.

So the Indian VIX mirrors the state of risk in the industry, when the Indian VIX  is high then the market experiences consideration shifts, also indicating the volatile time. If the India VIX is low then it signifies that the market is anticipating minute changes. 

Here is how they contribute to managing the market volatility and assessing potential risk for the investors.

• Identifying Market Volatility: It serves as a barometer for measuring the expected volatility in the market over the next 30 days. So the higher India VIX value indicates the greater anticipated volatility and the signifying potential market fluctuations.
• Risk Assessment for the Trading Strategies: So the traders often incorporate India VIX into their Trading Strategies to measure the market sentiment and adjust their positions accordingly. 
• Managing Portfolio Risks: The investor utilities India VIX to assess the level of risk associated with their investment portfolio. So the high VIX suggests increased market uncertainty and a higher potential for losses.

Also, Check - What is Gift Nifty

Key Feature of India VIX

Features of India VIX are Given Below:

• Inverse Relationship with the NIFTY, where the VIX typically rises during the NIFTY 50 Downturn.
• Here they focus on the Short term where the project volatility over the 30 days.
• The trading strategy aid where vital for the pricing option and the planning hedging strategies.

Conclusion

In conclusion, the VIX is a vital tool for investors and traders, providing insights into market potential volatility. So here we have mentioned all the details that you have to know about India VIX. 

About the Author

Saniya

I am a writer, and this sentence speaks louder than anything, I love to play with words because I have a passion for writing easy and good-quality content that reflects simplicity. Readers like content that is straightforward with simple language. My priority has always been to deliver content that connects with the reader.

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