India Vix stands for Indian Volatility Index, it is also known as Nifty Vix. It is an indicator that projects the volatility of the Nifty for the next 30 days. Higher the value of India Vix, the higher the expected volatility in Nifty and vice-versa.
Content:
- What is India Vix?
- India Vix Historical Data and What Does it Imply?
- Why is India Vix Index Important?
- How to use the India Vix Index in Option Selling?
- Quick Summary
- FAQs
What is India Vix?
India Vix stands for Indian Volatility Index, it is also known as Nifty Vix. It is an indicator that projects the volatility of the Nifty for the next 30 days. Higher the value of India Vix, the higher the expected volatility in Nifty and vice-versa. India Vix is built similarly to the CBOE (Chicago Board Options Exchange) Vix.
You might want to know: Top Nifty 50 Companies.
Check out how Vix is calculated here.
India Vix Historical Data and What Does it Imply?
Historical data implies that whenever the India Vix rises, the Nifty falls and whenever the India Vix falls Nifty rises.
To quote a great example:
On March 24, 2020, Due to the fear of lockdown across the whole country, India Vix hit an all-time high of 86.64, and Nifty hit a lower circuit, falling down to 3 years low of 7512.
India Vix Index – Why is it Important?
Well, if you are a trader or investor, it is a great deal to predict the volatility of the overall markets. And just to serve that purpose, India Vix was introduced. With India Vix, you can get a hint of the magnitude of change in the prices of Nifty for the next 30 days.
Here’s how you calculate the expected movement of Nifty for the next 30 days:
- The formula = Current VIX / Square root (Time) %.
- Let’s say VIX is currently trading at 20
- If you want to calculate Vix for the next 30 days. The time will be 365/30, which is equal to 12.
- The expected volatility of nifty will be 20/Square root (12) = 5.77%
- So you can expect up to 5.77% movement in Nifty either on the upside or downside in the next 30 days.
How to use the India Vix Index in Option Selling?
Firstly let’s understand how options selling works.
You buy options if you think the price of a stock or index will rise and sell if you think the price of a stock or index will fall.
Assume Nifty is trading at 14,000.
1st Scenario: If the option seller predicts nifty will not rise above the 14500 levels in the next 30 days, he will sell Nifty 14500CE, i.e., call options.
2nd Scenario: If the option seller predicts nifty will not fall below the 13500 levels in the next 30 days, he will sell Nifty 13500PE, i.e., put options.
3rd Scenario: If the option seller predicts nifty will stay between the range of 14500 – 13500 levels in the next 30 days, he will hedge the position by selling both Nifty 14500CE and 13500PE options.
Usually, the 3rd scenario works well as India Vix only tells you how much movement can happen rather than which way the movement will happen.
We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, and hence we bring you the important topics and areas that you should know:
Quick Summary
- Volatility is one of the most important factors considered by top investors and traders before investing.
- India Vix stands for Indian Volatility Index, it is also known as Nifty Vix. It is an indicator that projects the volatility of Nifty for the next 30 days. Higher the value of India Vix, higher the expected volatility in Nifty, and vice-versa.
- India Vix can be used to predict the range between which the Nifty will trade and use it to your advantage in Options Hedging.
FAQ(Frequently Asked Questions)
1. What Is The Use Of India VIX?
India Vix stands for Indian Volatility Index, it is an indicator that projects the volatility of Nifty Stocks for the next 30 days.
2. How Is VIX Calculated In India?
VIX is calculated by NSE based on the order book of the Nifty Options. For detailed mathematical calculations visit here.
3. What Happens If India VIX Decreases?
Higher the value of India Vix, higher the expected volatility in Nifty and vice-versa. Historical data implies that whenever the India Vix rises, Nifty falls and whenever the India Vix falls, Nifty rises.
4. What Is A Normal VIX Value?
The average VIX value ranges from 15 to 35. But this is just a theoretical value, there are real life examples of value fluctuations from 0 to 90.
To know how to set a limit on your trades in the stock market, check this.
