WHAT IS INDIA VIX ? AND ITS IMPORTANCE

If you Are Active In Stock Market Then You Have Heard About India VIX A Lot Of Times. But Don’t Know Exactly What Is India VIX? And Its Importance ?.

Well In This Article You Are Going To Learn About What Is India VIX, And Its Importance. Therefore After Reading This Article All your Doubts Will Be Cleared.

What Is India VIX ?

VIX Stands For Volatility Index, VIX Is Also Known As Fear Gauge Or Fear Index.

When One Says VIX, It Means For The U.S Stock Markets And Shows The Volatility Of S&P 500 Index, Based On S&P 500 Options.

For India, We Have India VIX, which Stands For India Volatility Index.

It Was Introduced By NSE In The Year 2008. But The Concept Of VIX Is Quite Old And It Is A Trademark Of CBOE ( Chicago Board Options Exchange ).

It Is Computed By NSE Based On The Order Book Of NIFTY Options. For This The Best BID – ASK Of Near And Next Month NIFTY Options Contracts Are Used.

It Is Used To Measure The Near Term Volatility Expectations Of The Markets. Higher The Value Of India VIX. Higher The Volatility And Vice-Versa.

If It Is At 20 Then We Can Expect The NIFTY To Move 20% Higher Or Lower During The Next One Year.

Volatility Index Is For An Index, Not For Stocks. In India, The Two Popular Indices Are Sensex And Nifty. VIX Is Available For Nifty50 Only.

Importance Of India VIX

It Plays A Major Role In Understanding The Fear Factor Among The Traders. Because If The India VIX Is Higher, We Can Expect Big Moves In Market And There Is Some Uncertainty In Markets.

A Lower Level Indicates That The Market Is Confident About The Movement And Is Excepting Lower Volatility And Stable Range.

India VIX Has Strong Negative Correlation With Nifty. Most Of The Times If Nifty Falls The India VIX Increases Because The Fear Increases And Vice-Versa.

For Example, During Corona Crisis India VIX Touches 86.63 Level, And Nifty Fallen Like Anything. It Does Not Give Any Indication Of The Directional Move In The Market But It Simply Indicates The Volatility In The Market.

How To Calculate Volatility Of Next One Month

If It Is At 25 Then We Can Expect The Market To Move 25% Higher Or Lower During The Next One Year. But People Are Not Bothered About One Year, Nobody Can Take A View For One Year.

So Normally In Options Or Futures, The People Only Play For One Month. By Using It We Can Predict How The Market Will Move In Next One Month.

It Is Mostly Used By Option Sellers.

Formula :

Volatility For Next 30 Days Or Month = India VIX / Square Root Of 12. ( 12 Because We Have 12 Months In A Year And Square Root Of 12 Is 3.46 )

Volatility For Next 30 Days Or Month = 25 / 3.46 = 7.2%

This Means We Can Expect The Nifty to Move 7.2 % Up Or 7.2 % Down In The Next 30 Days.

But This Is Only A General Guide To Know What Percentage Nifty Can Move For One Month Or a Year.