The Volatility Index measures the market’s anticipation of volatility in the near term. During market volatility, the market typically moves sharply up or down, and the VIX tends to climb. VIX falls as volatility falls. It is not the same as a price index like the NIFTY.The price index is calculated by considering the price movement of the underlying equities. The Volatility Index is calculated as an annualised percentage using the order book of the underlying index options. The National Stock Exchange (NSE) introduced the India VIX, or India Volatility Index, in 2008 and NVIX Futures in 2014. It is a prevalent belief that volatility indexes like the VIX and India VIX duplicate the mean reversion of the value by fluctuating around a long-term variance.

The India VIX today measures investor perceptions of market volatility in India. It is calculated using a system akin to that of CBOE, which includes the best bid-ask prices and the anticipated level of volatility for the following 30 days, with minor modifications to fit and adapt the options order book of NIFTY. Let us first understand what is india vix?

What is India VIX?

The India Volatility Index is referred to as India VIX. It estimates how volatile investors expect the NSE index to be during the upcoming thirty days. It gauges the price adjustments market players anticipate in response to important news. Investors are likely to invest when the index value is low since there is less market angst.

On the other hand, a more significant transaction indicates more unpredictability and worry. Investors with a sizable equity market exposure often monitor the India VIX. The “fear index” is a common term used to describe it. The significance of India VIX can be observed in its connections to NIFTY and market volatility.

India VIX has been found to have a strong negative correlation with NIFTY and a positive correlation with market volatility. As a result, when the India VIX increases, investors may anticipate a decline in the market.

Understanding India VIX in the stock market

Understanding the India VIX meaning before investing is crucial to preventing market volatility. Since all significant directional market movements are preceded by market choppiness, the India VIX is essential in determining whether investors are optimistic or fearful. A lower VIX indicates low volatility and a stable price range for the asset.

An elevated VIX reflects high volatility and a lack of investor confidence to trade within the market’s current capacity. The expansion of the present scope typically portends a significant market direction shift.

The India VIX is a trustworthy and accurate indicator of market volatility and variations that alerts intraday traders to increases and decreases in market volatility. They might use this to assess the market risks for stocks. These traders risk having their stop losses activated if market volatility is on the rise; as a result, they may want to reduce their leverage or increase their stop losses. The India VIX, also known as the volatility index, provides information on the market circumstances, which is crucial for making this decision.

India VIX: Computation Methodology

The ‘Futures Based on the Volatility Index’ or ‘FIV’ approach is used to compute the India VIX Index. It considers the cost of Nifty 50 option contracts for the next month and the month after. The implied volatility of these options, which reflects the market’s anticipation of future volatility, is used to calculate the VIX Index. The projected size of price changes, as indicated by the pricing of the options, is referred to as implied volatility.

The Black-Scholes-Merton option pricing model is used in the India VIX calculation methodology to calculate implied volatility. The process considers the costs of several options contracts to determine the final VIX value. The projected annualised volatility over the upcoming 30 days is represented by the India VIX Index, which is given in percentage terms. Assume that the VIX Index for India is now at 20. This indicates that during the upcoming 30 days, the Nifty 50 index is expected to see annualised volatility of 20%.

Lower VIX levels imply lower predicted volatility, whereas higher VIX values indicate higher expected volatility. The VIX Index shouldn’t be viewed as a direct indicator of market direction. Instead, it demonstrates how the market anticipates volatility and might aid investors in determining the degree of uncertainty.

Is there an ideal range for India VIX?

The theoretical range of the India VIX share is 15 to 35. However, there have been severe outliers with fields as narrow as 8 (extremely tight) and as wide as 90 (excessive volatility). The index may quadruple or reach zero if VIX moves near zero.

However, VIX typically tends to return to the mean. The world markets experienced intense heat and extreme volatility during the COVID-19 global crisis (March–April 2020), and the Indian equities market was no exception. All major global indices dropped roughly 35% from their recent highs. India’s VIX reached an all-time high of 90 during those two days due to this level of volatility. After June–July 2020, it appeared to stabilise.

The global factors must improve, and the India Vix level should ideally reach 20 levels for stability to return. The market seems to be stabilising, with the current VIX reading of 22 March 2021. But sub-20 levels of VIX are preferred for the market’s long-term stability.

Investors keep a tight check on the India VIX to determine market mood and analyse potential risks, noting whether it fluctuates within the India vix normal range or signals increased volatility.

Conclusion

India VIX is a valuable tool for options traders. Options enable you to buy or sell a specific investment at a predetermined price in the future. Options gain in value when volatility increases. Therefore, an options trader may closely monitor variations in the India VIX. India VIX is a valuable instrument, even for stock traders. There is a danger that stock traders’ stop losses will be swiftly triggered when volatility increases. This is due to the possibility of abrupt price changes during high volatility.

As a result, they might need to modify their stop losses to account for the volatility fluctuation. India VIX provides insightful data on market volatility. Traders must notice variations in market volatility and change their methods as necessary. Long-term investments may still be profitable despite short-term swings in volatility, but if volatility rises over time, investors may want to reassess their equities holdings.