What is India VIX or Volatility Index
Vijay C Roy
If you are a relatively new investor and entered the market probably in March or April this year, you might have come across the term ‘India VIX’ almost every other day, especially since the first phase of the Lok Sabha elections on April 19. The index has been on an uptrend ever since the elections got underway.
India VIX is short for India Volatility Index, which indicates the volatility and fluctuations in the market.
India VIX measures how much volatility investors expect in the stock market (Nifty 50 Index) over the next 30 days. The concept of VIX originated in the United States. The Chicago Board of Options Exchange introduced it in 1993; it was initially based on the S&P 100 Index options. In 2003, they updated it to reflect the S&P 500 Index options. The National Stock Exchange adapted this methodology to suit the Indian market, launching the India VIX in 2008.
India VIX and Nifty
India VIX indicates if the market is expecting the Nifty 50 index to be volatile or not. So, when the Nifty is expected to be volatile — meaning that it can increase or decrease rapidly — VIX tends to rise and when it is expected to be stagnant or stable, VIX will be low. In a way, India VIX is directly proportional to the rapid movements in Nifty and inversely proportional to its stability.
High and low indicators
According to Prashant Rao, director and head, Equity Capital Markets, Anand Rathi Investment Banking, it is when the index is in the range of 15-20 that the markets are usually stable. But, in exceptional cases like the announcement of the lockdown in March 2020, the index went up to 70. It was in the range of 20-30 several times during the recent elections. It went to a low range of 8-11 when the markets were stagnant for a long period of time.
When the VIX is down
VIX going down is not a sign of good or bad, it means that the market will be stable. It can be good for traders who sell options and who want the market to be stable so that they can benefit from the options expiring. Conversely, it may not be beneficial for traders who buy options or in general buy or sell stocks in the Nifty 50 index when the VIX is down.
Guide for retail investor
Retail investors can use the VIX to judge the volatility in the market. Volatility index can be used as a leading indicator of the Nifty index to make investment decisions, but only after considering other metrics like fundamental growth, valuations, quality of management, etc, in a company.
Range in current fiscal
Since the first phase of the Lok Sabha elections, Indian stock markets have been topsy-turvy. “In the current calendar year, VIX was between the range of 13-15, but since May, when elections were ongoing, the index started rising and went up to as high as 26.5 in the run-up to the results. VIX has come down to the range of 15-20 in the last few days and how it will move in the near future depends on multiple factors like the final budget, new policies and focus of the government in different sectors,” says Rao.
Calculating the index
Calculation of India VIX is not the same as a price index like the Nifty. “While a price index is determined based on the price movements of individual stocks, the Volatility index is calculated as an annualised percentage, using the order book of the underlying index options. It uses the best bid-ask quotes from near-month and next-month Nifty options contracts (traded in the NSE’s Futures & Options segment). While calculating the India VIX, time to expiry, interest rate, forward index level and bid-ask are taken into account,” says Rao.
