Home Learn What is India VIX Index? Calculation, Meaning, Range & Volatality

What is India VIX Index? Calculation, Meaning, Range & Volatality

What is India VIX Index? Calculation, Meaning, Range & Volatality
Reading Time: 13 minutes

In the world of investing, understanding volatility can be an essential factor to make informed decisions. One tool that can help is the India VIX, which can measure the expected volatility of the Nifty 50 Index. In this blog, we will explore the definition of volatile shares, VIX calculation and importance of the India VIX.

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.

These can move up or down quickly, making them attractive to trade VIX for short-term price movements.

Some of the characteristics of highly volatile stocks include:

  • 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 Capitalization: Small-cap stocks are usually more volatile than large-cap stocks. This is because they are less liquid and have fewer shares outstanding, which means that the price can fluctuate more easily.
  • News Sensitivity: Volatile stocks are often sensitive to news and events that affect the company or the industry.

What is India VIX?

Volatility index India or India VIX means a measure of the expected volatility of the Nifty 50 Index options over the next 30 days. It can be calculated using the Black-Scholes model and may represent the market’s expectation of the Nifty 50’s movement in the near future.

It was initially introduced by the Chicago Board of Options Exchange (CBOE) based on its S&P 100 Index option prices in 1993. This methodology was adopted by the NSE, and India VIX was launched in 2008, followed by VIX Futures in 2014.

The India volatility index can be calculated using the Black-Scholes model, which takes into account the current market price of the Nifty 50 Index, the strike price of the options, the time to expiration, and the risk-free interest rate. The formula for the India VIX can be a little complex, but it can be simplified as the square root of the variance swap rate.

Understanding volatility and India VIX might help investors and traders to make informed decisions about their investments. For example, a India VIX high means that market participants expect increased volatility, while investing in highly volatile stocks carries both risks and opportunities.

Importance of India VIX

The India VIX or Indian Volatile Index can be a useful tool for traders and investors in predicting future market volatility. A high India VIX indicates that the market is expecting increased volatility, while a low India VIX suggests that the market is anticipating less volatility. Traders can use this information to make informed decisions about their investments.

What India VIX Indicates?

The India VIX, or Volatility Index, indicates the expected market volatility or investor sentiment in the Indian stock market. It reflects the degree of uncertainty and risk in the market. When the India VIX is high, it might suggest that investors anticipate greater price fluctuations. Conversely, a low India VIX might indicate a more stable market, where investors expect less price volatility. 

In historical terms, the India VIX and NIFTY may have shown a robust negative correlation in the India VIX charts. This means that as volatility increases, the NIFTY may tend to decline, and vice versa.

What Elements are Considered While Calculating the India VIX or the Volatility Index?

Calculating the India VIX, or Volatility Index, 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: The out-of-the-money option contracts are used for India VIX calculation. The forward index level, determined from the most recent NIFTY future contract price for the respective expiry, plays a pivotal role.
  • Bid-Ask Prices: The best bid and ask prices of out-of-the-money option contracts are utilized for the calculation, with the ATM strike serving as the reference point. This strike is the price slightly below the forward index level.

How India VIX is Calculated?

The India VIX may utilize a methodology inspired by the CBOE’s approach, with necessary adjustments to suit the NIFTY options market, which may include techniques like cubic splines.

The India VIX formula is as follows:

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

The India VIX calculationIn formula includes:

  • “Sum of Weighted Implied Volatility Squared” represents the summation of squared implied volatilities, each multiplied by its corresponding weight.
  • “Total Weight” signifies the sum of the open interest of all options involved in the calculation.

How is Volatility Calculated on smallcases?

smallcase too, can be an attractive investment opportunity for those who want to diversify their portfolios & yield significant returns. smallcase offers an excellent opportunity for portfolio investing!

Volatility is a key factor while analyzing smallcases that may fit correctly into your investment plans and overall financial goals.

Every smallcase is categorized 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) + 0.3*Average (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) + 0.3*Average (Rolling 1y sd of nifty’s daily return since launch except last 1Y)]

This is expected to make the volatility label more responsive to recent market trends and solve any previous concerns. The volatility ratio so obtained will be mapped to labels by using the below table:

Volatility Ratio (VR)Label
VR >= 1.2High Volatility
0.8 <= VR < 1.2Medium Volatility
VR < 0.8Low Volatility

If the smallcase is less than 1 year old –

If the weight of equities in the portfolio is 

  • less than 40%, the smallcase will be assigned the Low Volatility label
  • between 40% to 70%, the smallcase will be assigned the Medium Volatility label

If the weight of equities in the portfolio is greater than 70%, then the weight of large-cap stocks within the equities portion is taken into consideration. In this case, if the weight of large-cap stocks within the equity portion is 

  • more than 85%, the smallcase will be assigned the Medium Volatility label
  • less than 85%, the smallcase will be assigned the High Volatility label

For smallcases where the manager has not prescribed any weights, equal weights will continue to be assumed for calculations.

How India VIX is Used in Trading?

Now that you understand the implications of the India VIX, let’s explore its various market applications:

  • For Equities Traders: The VIX serves as a valuable indicator of market risk for equities traders. It informs both intraday and short-term traders about changes in market volatility, helping them adjust their trading strategies accordingly.
  • Intraday Traders: When the VIX suggests a rapid increase in volatility, intraday traders face the risk of sudden stop-loss triggers. In response, they may consider reducing leverage or adjusting their stop-loss levels to align with the evolving market conditions.
  • Long-Term Investors: Long-term investors, who typically focus on the bigger picture, are less concerned about short-term volatility. It indicates rising volatility, they might consider increasing their hedges, often using put options to hedge their positions.
  • Options Traders: The VIX is a valuable tool for options traders. Volatility is a key factor when deciding whether to buy or sell options. When volatility is expected to increase, options become more attractive, and option buyers may potentially benefit more. Conversely, a declining VIX can lead to a decrease in time value, which can be advantageous for option sellers.
  • Trading Volatility: If you anticipate higher market volatility, one strategy is to purchase straddles or strangles. However, these strategies can become costly when volatility is expected to surge. A more cost-effective approach might be to buy futures on the VIX index itself, allowing you to profit from increased volatility.

What are the Applications of India VIX in the Indian Market?

India VIX is a reliable and sound indicator of the market volatility offering intraday traders insights into market volatility shifts.

  • Risk Assessment: India VIX is a key indicator of market risk. 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. Traders and investors may use this information when buying or selling options.
  • Hedging: Traders and investors can use India VIX to hedge against potential losses during market downturns. It allows them to take protective measures and minimize the impact of adverse market movements.
  • Asset Allocation: India VIX can influence asset allocation decisions. When the VIX is high, investors might opt for a more conservative allocation to reduce overall portfolio risk.
  • 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 India VIX 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 Invest in India VIX?

Individuals with brokerage accounts that offer derivatives trading can access India VIX, open to both retail and institutional investors. Nonetheless, it’s vital to acknowledge that India VIX is a volatile instrument. Investors should thoroughly evaluate their risk tolerance and investment goals.

Several types of investors who might consider India VIX include:

  • Hedgers: Those seeking to safeguard their existing portfolios against market volatility can employ India VIX for hedging. For instance, an investor with a stock portfolio may use India VIX futures to mitigate potential losses during a market decline.
  • Speculators: Investors who anticipate future changes in India VIX may speculate on its movements to generate profits. For example, if they expect increased market volatility, they may purchase India VIX futures.
  • Options Traders: India VIX is a tool for options traders to craft and manage trading strategies. For example, options traders can sell India VIX calls for income or purchase India VIX puts as a safeguard against losses.

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.

AspectInd VIXNIFTY
Full NameIndia Volatility IndexNIFTY 50
TypeVolatility indexStock market index
Calculation MethodImplied volatility of optionsMarket capitalization
PurposeMeasures expected volatilityRepresents stock prices
Indicator ofMarket uncertaintyOverall market performance
Intraday UpdatesYesYes
FrequencyUpdated real-timeUpdated during market hours
InterpretationHigher values indicate higher expected volatilityRepresents the performance of the top 50 stocks
Trading StrategyUsed for risk management, option trading, and market sentiment analysisBasis for equity and derivatives trading, passive and active investing
ComponentsBased on NIFTY optionsConstituent stocks of the NIFTY 50
Weighted or AggregatedAggregated based on option pricesWeighted by market capitalization
Historical DataAvailable for analysisHistorical NIFTY data widely used for analysis
Market SegmentPrimarily for derivatives market analysisBroad equity market analysis

Benefits of Investing in India VIX Volatile Stocks

nvesting in volatile stocks can present opportunities for gains. Some of the benefits of investing in index VIX or volatile stocks include:

  • Profit Opportunities: Stocks with higher volatility can offer greater profit potential, as their prices tend to experience larger price swings. Traders and investors may seek to capitalize on these price fluctuations.
  • Diversification: Including IndiaVIX volatile stocks in a portfolio can add diversification. They may not always move in lockstep with the broader market, which can help spread risk.
  • Hedging Possibilities: Some investors use volatile stocks as a means of hedging against market downturns. When the broader market declines, these stocks may perform differently, potentially offsetting losses elsewhere in the portfolio.
  • Liquidity: Popular volatile stocks often have high trading volumes, which can result in better liquidity. This liquidity allows for more straightforward entry and exit from positions.
  • Short-Term Trading Opportunities: Traders who thrive on short-term strategies may find volatile stocks appealing. These stocks can provide more frequent trading opportunities, allowing for short-term gains.

Risks of Investing in Volatile Stocks

Some of the associated risks of investing in volatile stocks that you might want to consider before investing. 

  • High Volatility: Volatile stocks are associated with high volatility, which means that the price can fluctuate significantly over a short period. This can result in substantial losses if the stock price falls.
  • Lack of Liquidity: Small-cap volatile stocks are often less liquid than large-cap stocks. This means that it can be challenging to buy or sell these stocks, which can lead to losses.
  • News Sensitivity: Volatile stocks are often sensitive to news and events that affect the company or the industry. This means that unexpected news can result in significant price changes.

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. It’s important to recognize that, while they may offer the potential for short-term returns, it may inherently carry a high level of risk. As always,  please do your own research and/or consult a financial advisor before investing.

FAQs

1. What is India VIX meaning? 

India VIX, or Volatility Index, gauges expected stock market volatility. It potentially reflects market sentiment and risk, aiding trading and investment decisions.

2. How much India VIX is volatile?

India VIX is a volatile index that measures market expectations of near-term volatility, usually it ranges between 15 and 35, but can spike higher during uncertain times.

3. Can I buy or sell India VIX?

Yes, you can buy or sell India VIX futures and options on the National Stock Exchange of India (NSE). However, it is a complex product and only suitable for experienced traders.

4.  What does India VIX low means?

A decline in the VIX index indicates that investors are less fearful and expect lower volatility in the stock market in the coming 30 days.

5. How to use VIX to predict market?

The VIX, a measure of expected volatility, can be used as a contrary indicator to predict market direction. When the VIX is high, it suggests that investors are fearful and the market is likely to rebound. When the VIX is low, it suggests that investors are complacent and the market is more likely to decline.

6. What does NIFTY VIX means?

Nifty VIX is a volatility index that measures the market’s expectation of volatility in the Nifty 50 index over the next 30 days. It is calculated using the order book of Nifty 50 index options. Nifty VIX price is currently at 15.60.

All You Need to Know About Starting Your Share Market Journey

Share market investments can seem a bit tedious at first but smallcase is here to simplify all your queries and worries. Right from “Share market for beginner”, “Portfolio Diversification” to “short term investments” we’ve got all the tips, just a single click away –