What is India VIX Index? Calculation, Meaning, Range & Volatality
When it comes to investing, understanding volatility can be an essential factor in making informed decisions. India VIX Index, often referred to as the “fear gauge,” measures the expected volatility of the Nifty 50 Index and tells investors how much market volatility to expect. A high VIX signals turbulent conditions (higher risk), while a low VIX suggests stability. In this blog, we will explore the definition of volatile shares, VIX calculation and the importance of the India VIX.
What is India VIX?
The India VIX, or Volatility Index India, shows how much the Nifty 50 index is expected to move over the next 30 days. It is calculated using the Black–Scholes option-pricing model and reflects the market’s forecast of short-term volatility.
Initially, the India volatility index was introduced by the Chicago Board Options Exchange in 1993 for the S&P 100; this India VIX volatility measure was adopted by India’s NSE in 2008. India VIX futures began trading in 2014.
Knowing the India VIX helps investors and traders make better decisions:
- Under normal market conditions, India VIX typically ranges between 11 and 17, averaging about 11.7 over time.
- A higher VIX means the market expects bigger price fluctuations, indicating more risk but also more opportunity, while a lower VIX suggests calmer markets.
What are Volatile Stocks?
Volatile stocks are those that experience significant price fluctuations over a short period of time. This volatility can be affected by a range of factors, such as company news, industry trends, and macroeconomic conditions.
Characteristics of Highly Volatile Stocks
- High Beta: The beta of a stock measures its volatility in comparison to the overall market. A high beta means that the stock is more volatile than the market.
- Low Market Capitalisation: Small-cap stocks are usually more volatile than large-cap stocks. They are less liquid and have fewer shares, so their price can fluctuate more easily and can influence the India VIX correlation with Nifty.
- News Sensitivity: Volatile stocks are often sensitive to news and events that affect the company or the industry. Therefore, understanding what the India VIX indicate in such cases can be beneficial for anticipating market reactions.
History of India VIX
The India VIX was launched by the National Stock Exchange (NSE) in 2008. Modelled after the CBOE’s VIX, introduced in 1993, India VIX is based on Nifty 50 option prices and became a key risk indicator. In 2014, VIX Futures were introduced in India, providing more tools for risk management.
Importance of India VIX
Let’s check why the VIX India is essential in the stock market:
- Purpose of India VIX: The Indian Volatility Index (India VIX) is a useful tool for traders and investors to predict future market volatility.
- Interpreting VIX Levels: A high India VIX means the market expects increased volatility, while a low India VIX suggests less expected volatility.
- Utilising India VIX for Investing Decisions: Traders, especially those involved with high beta stocks, can use India VIX data to make informed investment decisions.
- Understanding India VIX and Its Live Data: Understanding what India VIX is and how to interpret its live chart helps investors anticipate market moves effectively.
- Calculation Insights of India VIX: Knowing how India VIX is calculated, such as by using the India VIX calculator, assists investors in navigating complex market situations.
- Simplified Formula Explanation: The India VIX formula can be simplified as the square root of the variance swap rate, even though the complete India VIX calculation is more complex.
What India VIX Indicates?
As discussed, the India VIX shows the expected market volatility or investor sentiment in the Indian stock market. But it also indicates how much uncertainty and risk investors see in the market. This is what high and low volatility mean in India VIX.
- A high India VIX indicates that the investors expect bigger price changes. This can often be seen in high beta stocks.
- A low India VIX indicates a more stable market with less price movement expected.
Historically, India VIX and NIFTY have shown a strong negative relationship. This means:
- When volatility goes up → NIFTY often goes down
- When volatility goes down → NIFTY tends to rise
By watching the India VIX live chart, investors can track how market expectations change over time.
What Elements are Considered while Calculating the India VIX?
Calculating the India VIX involves considering several essential elements:
- Time to Expiry: Time to expiry is measured in minutes for precision in reflecting market volatility.
- Interest Rate: The relevant risk-free interest rate for the 30 to 90-day tenure is factored into the calculation.
- Forward Index Level: India VIX calculation is done using out-of-the-money option contracts. The forward index level, based on the latest NIFTY futures price, aids in India VIX analysis to assess market volatility.
- Bid-Ask Prices: India VIX is calculated using the best bid and ask prices of out-of-the-money option contracts. The at-the-money (ATM) strike, used as a reference, is the strike price just below the forward index level.
How India VIX is Calculated?
The India VIX uses a method inspired by the Chicago Board Options Exchange (CBOE), with some changes to fit the Nifty options market. It also incorporates techniques like cubic splines.
The formula is:
India VIX = 100 * √((Sum of Weighted Implied Volatility Squared) / Total Weight)
- The “Sum of Weighted Implied Volatility Squared” means adding up each squared implied volatility multiplied by its weight.
- “Total Weight” is the sum of the open interest of all the options used in the calculation.
This can help investors understand how market volatility is measured in India. Moreover, watching the India VIX chart lets investors stay updated on real-time volatility, helping them grasp what India VIX means for short-term investments.
How to Interpret the Rise and Fall of VIX?
Understanding the rise and fall of India VIX helps investors gauge market sentiment and make informed trading decisions.
- Fear Gauge: A rising India VIX signals increased market fear and panic selling, driven by demand for protective puts.
- Correction Warning: VIX spikes often precede or accompany market downturns, acting as an early warning for corrections.
- Complacency Signal: A low VIX (below ~15) indicates market complacency and steady rallies, but may warn of excessive optimism.
- Contrarian India VIX indicators: Extreme VIX spikes (40–50+) have marked market bottoms, offering potential buying opportunities for contrarian investors.
How is Volatility Calculated on smallcases?
smallcase enables investors to access professionally curated portfolios for diversification across various asset classes. Investors may explore different portfolio options on smallcase, each aligned with specific investment strategies and risk profiles.
Volatility is a key factor when analysing smallcases that may fit correctly into your investment plans and overall financial goals.
Every smallcase is categorised into one of the three volatility buckets – High, Medium and Low Volatility. This is done by comparing smallcase volatility against that of the Nifty 100 Index.
If the smallcase is more than 1 year old –
Volatility = a/b where
- a = [0.7 Average(Rolling 1y sd of smallcases daily return for last 1Y) + 0.3Average (Rolling 1y standard deviation of smallcases daily return since launch except last 1Y)]
- b = [0.7 Average (Rolling 1y sd of nifty’s daily return for last 1Y) + 0.3Average (Rolling 1y sd of nifty’s daily return since launch except last 1Y)]
Volatility Ratio
The Volatility Ratio (VR) helps make the volatility label more responsive to recent market trends and addresses earlier concerns. The VR values are mapped to labels as follows:
| Volatility Ratio (VR) | Label |
| VR >= 1.2 | High Volatility |
| 0.8 <= VR < 1.2 | Medium Volatility |
| VR < 0.8 | Low Volatility |
If the smallcase is less than 1 year old:
- If the equity weight in the portfolio is less than 40%, the smallcase gets a Low Volatility label.
- If the equity weight is between 40% and 70%, the label is Medium Volatility.
- If the equity weight is more than 70%, then look at the large-cap stock weight within equities:
- If large-cap weight is more than 85%, the label is Medium Volatility.
- If large-cap weight is less than 85%, the label is High Volatility.
For smallcases without specified weights from the manager, equal weights will be used for all calculations.
How to Use India VIX in Trading?
Now that you know what India VIX means, let’s see how it can be used in markets:
- For Equities Traders: India VIX shows intraday and short-term traders how market volatility is changing. By watching India VIX today and its movement, you can better predict market trends.
- Intraday Traders: When India VIX rises quickly, intraday traders face a higher risk of stop-losses. They may reduce leverage or adjust stop-loss levels based on market conditions.
- Long-Term Investors: Long-term investors focus on the bigger picture and are less worried about short-term volatility. However, if volatility rises, they might increase hedges, often using India VIX options to protect their positions.
- Options Traders: When volatility is expected to rise, options become more valuable, benefiting option buyers. When the Nifty VIX falls, the option time value decreases, which helps option sellers. Knowing how India VIX is calculated helps optimise trading strategies.
What are the Applications of India VIX in the Indian Market?
India VIX is a trusted indicator of market volatility. It helps intraday traders adjust their India VIX strategies by anticipating changes in market conditions and volatility.
Risk Assessment
It helps investors and traders gauge the level of risk and uncertainty in the stock market, enabling them to make more informed investment decisions.
Option Pricing
It assists in determining option prices. Higher India VIX values may indicate greater expected market volatility, leading to higher option premiums. Options traders frequently check India VIX today when making buy or sell decisions.
India VIX Hedging
Traders and investors can use India VIX to hedge against potential losses during market downturns. It allows them to take protective measures and minimise the impact of adverse market movements.
Asset Allocation
When the VIX is high, investors might opt for a more conservative allocation to reduce overall portfolio risk. Keeping track of the India VIX range ensures that investors can adjust their asset mix based on prevailing market conditions.
Market Timing
It can assist traders and investors in timing their entry and exit points in the market. High VIX levels may prompt a more cautious approach, while low VIX levels might encourage more aggressive market participation.
Useful for Portfolio & Fund Managers
The metric is a valuable index for portfolio managers and mutual fund managers. Fluctuations in the VIX guide their decisions on investing in high or low beta stocks for optimal returns.
Who Can Use the India VIX?
India VIX helps different market traders manage risk, profit, or improve trading strategies. Here’s the list of who can use the VIX:
- Hedgers: If you already have a portfolio and want to protect it from market volatility, you can use India VIX for hedging. For example, an investor with a stock portfolio can use India VIX futures to reduce losses during a market fall.
- Speculators: If you think India VIX will change in the future, you can speculate on it to make money. Monitor the India VIX range and India VIX today to cash in on the market move.
- Options Traders: It’s a tool for options traders to create and manage their strategies. Options traders can sell Nifty calls for income or buy Nifty puts to hedge against volatility, using India VIX as a benchmark.
However, it is advisable to do your own research and/or consult a financial advisor before investing.
What is the Relation of India VIX and Nifty?
Let’s have a look at the differences between VIX India vs NIFTY.
| Aspect | Ind VIX | NIFTY |
| Full Name | India Volatility Index | NIFTY 50 |
| Type | Volatility index | Stock market index |
| Calculation Method | Implied volatility of options | Market capitalisation |
| Purpose | Measures expected volatility | Represents stock prices |
| Indicator of | Market uncertainty | Overall market performance |
| Intraday Updates | Yes | Yes |
| Frequency | Updated real-time | Updated during market hours |
| Interpretation | Higher values indicate higher expected volatility | Represents the performance of the top 50 stocks |
| Trading Strategy | Used for risk management, option trading, and market sentiment analysis | Basis for equity and derivatives trading, passive and active investing |
| Components | Based on NIFTY options | Constituent stocks of the NIFTY 50 |
| Weighted or Aggregated | Aggregated based on option prices | Weighted by market capitalisation |
| Historical Data | Available for analysis | Historical NIFTY data widely used for analysis |
| Market Segment | Primarily for derivatives market analysis | Broad equity market analysis |
Factors Influencing India VIX
Here are some factors that affect India VIX:
- Market Volatility: The metric directly reflects fluctuations in the Nifty 50 index, making it the most immediate indicator of market sentiment and risk.
- Global Economic Events: Geopolitical tensions, financial crises, and central bank actions globally may impact market uncertainty, driving up the VIX.
- Interest Rate Decisions: Changes in the Reserve Bank of India’s interest rate policy may affect investor expectations and market dynamics, influencing volatility levels reflected in the VIX.
To learn more about the risks of investing in volatile stocks, you can read our article on high volatility stocks.
To Wrap It Up…
To conclude, understanding volatile stocks and the India VIX index is a critical aspect for traders and investors navigating the financial markets. Knowing how to use India VIX for trading and being aware of how VIX is calculated can significantly improve one’s ability to manage risks and capitalise on market opportunities. It’s important to recognise that while they may offer the potential for short-term returns, they may inherently carry a high level of risk. As always, please do your own research and/or consult a financial advisor before investing.
Note: If traders expect higher volatility, they can buy straddles or strangles (which are costly) or buy cheaper India VIX futures to profit. Watching the India VIX range helps to find the best time to trade.
FAQs
India VIX, or Volatility Index, measures expected stock market volatility. It reflects market sentiment and risk to help you trade and invest.
Yes, you can buy or sell India VIX futures and options on NSE. But it’s a complex product and meant for experienced traders only.
A fall in VIX indicates lower volatility expectations in the market, highlighting the India VIX significance in reflecting investor sentiment and reduced fear over the next 30 days.
Nifty VIX is a volatility index that measures the market’s expectation of volatility in the Nifty 50 index for the next 30 days. It’s calculated using the Nifty 50 index options order book. Nifty VIX is currently at 15.60.
The correlation between India VIX and Nifty is inversely related. When the Nifty 50 index rises, VIX falls, meaning lower market uncertainty. When the Nifty falls, the VIX rises, indicating higher risk. This helps you gauge the India VIX market sentiment and risk.
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