India VIX: An economy indicator

India VIX

Volatility Index (VIX) is a measure of market’s expectation of volatility over the near term. Volatility is often described as the “rate and magnitude of changes in prices” and in finance often referred to as risk. VIX Index is a measure, of the amount by which an underlying Index is expected to fluctuate, in the near term, (calculated as annualised volatility, denoted in percentage e.g. 20%) based on the order book of the underlying index options. India VIX

India VIX is a volatility index based on the NIFTY Index Option prices. From the best bid-ask prices of NIFTY Options contracts, a volatility figure (%) is calculated which indicates the expected market volatility over the next 30 calendar days. India VIX uses the computation methodology of CBOE, with suitable amendments to adapt to the NIFTY options order book using cubic splines, etc. You can see a rise in the volatile index when the market is continuously fluctuating and going up and down.

This shows the increase in volatility in the market. Similarly, when the market is more stable and the volatility is less, you can see a fall in the volatility index. This index represents the investors’ perception of the market over the next near term, that is the next 30 days. The rise and fall in the India VIX or volatile index determines the volatility of the market and helps the investors to better understand the market conditions before making their next big investment or while keeping a track of their previously made investment.

What are the elements while considering India VIX? Let us know about them:
  1. Time to expiry:-  Instead of taking days to calculate the time to expiry, it is calculated within minutes to achieve a level of precision which is expected by the traders.
  2. Interest rate:-  While considering the risk-free interest rate for the respective expiry months of the NIFTY options contract, the relevant tenure rate which is for 30 to 90 days is taken into account and considered as the risk-free interest rate
  3. Forward index level:-  The out of money options contract which is considered while calculating the volatile index is identified using the forward index level.

India VIX is a reliable and sound indicator of the market volatility and fluctuations which informs the intraday traders about the rise and fall in the market volatility. This helps them to determine the market risks for equities. If the volatility in the market is at a rise these traders face a risk of their stop losses being triggered and hence, they might want to lower their leverage or expand their stop losses. To make this decision knowing the market conditions is extremely important which is provided by the India VIX or volatility index.

 

Nifty is a market index whereas, India VIX is a volatility index. While market indices such as the Nifty measure the direction of the market and is evaluated based on the price movements of the underlying stocks, a volatility index such as India VIX indicates the volatility of the market and is calculated using the order book of the underlying index’s options. India VIX has a strong negative correlation with Nifty. When the India VIX falls, the Nifty is seen to rise and vice versa.

What made India VIX fall now?

On April 23, India VIX had dropped 20 per cent to 10.2 levels, which analysts attributed to the then prevailing positive sentiment in the domestic markets. Since then, India VIX has climbed steadily and surged over 72 per cent to hit the 17.56 mark in intra-day deals on Tuesday, May 07. Analysts attribute this rise to nervousness ahead of the outcome of Lok Sabha elections on June 4, and expect India VIX to continue its journey north as the election outcome day nears.

That apart, the two key factors, , are driving the VIX’s rise since the past few trading sessions. First, portfolio investors are buying protective put options to hedge their holdings. Second, traders are speculating on significant price movements post-election by purchasing both calls and put options. In early April 2024, when Nifty tested a new record peak, India VIX was near 11, but is now above 16, when the indices are again back in the vicinity of the record peak. Similarly, when in mid-January 2024, when the Nifty50 neared its peak levels, VIX was 13.78, but three weeks later when Nifty returned to the same peak, VIX would rise to the 15-16 region, where it remained for the rest of February.

How to use the VIX?

“If the VIX is high, it’s time to buy” tells us that market participants are too bearish and implied volatility has reached capacity. This means the market will likely turn bullish and implied volatility will likely move back toward the mean. I f the VIX is high, we know the market will be going down as there is gonna be a phase of volatility and market may face some resistance in that phase. We should never doubt the market because “Today if it fall, tomorrow its gonna rise even better”. Market and VIX move opposite.

India VIX current status:

Currently, India VIX is very high due to Lok Sabha elections tensions risings as voters are not turning out to vote and also due to mixed earning of Nifty 50 companies. India VIX is  at a 52 week high right now. Right now is a good time to enter the markets and make your investments. The markets are consolidating before it is going to make a steep rise. Indian stock markets are going to remain low till the elections results are out.

There is no stopping this fall right now. India VIX is now rising and not stopping. It is creating a problem to the Indian stock market and making it fall continuously. Today, for the very first time India VIX has crossed 20 points. It is making new highs each and every day. It finally reached to an all time high of 21.88. This caused big correction in the market and opened a buying opportunity for the people.

Crossing 20 points was a big thing for investors but yesterday it created another all time high of 22.30. The fear is being created among investors. Fear is also created among Indian markets. Market is till unsure that Narendra Modi will become prime minister of India. India VIX is not coming down the 20 points mark once it reached there.

Will India VIX fall?

Well this is a tough question to answer. For India VIX to fall many things  happen like:

  • There are more buyers
  • Global markets going up
  • Pre major event
  • investors and institute high expectations
  • Great potential country

For India VIX to fall it is really important for investors to show trust in the market. There have to be buyers and also currently, there are not many people participating to vote in the elections which creates a concern between the country and the people of country. India under this government has great potential to be the in the top 3 economies in the world. Now, people are investing more and are entering the market more. Big institutes like Goldman Sachs, JP Morgan have showed great potential growth in India. They have predicted growth of more than 6.5% for this year.

Global markets are going up. We can see in the USA or Gift Nifty and others. All these markets are rising high. Indian markets are trying to cope up with them and are rising well. Since the Lok Sabha elections are going on in India, there are many expectations and promises being made by the competitors. A change in government will be a problem to investors. People of India have to show trust in the current government. If the current government wins, the market will shoot up and India VIX will fall. People will become more sure of the movement in the market. It may lead to more numbers of investors.

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shaurya saxena
Author: shaurya saxena

Some of my posts to start my journey as a digital marketer. This has helped me a lot and request you to help me further.

About shaurya saxena

Some of my posts to start my journey as a digital marketer. This has helped me a lot and request you to help me further.

View all posts by shaurya saxena →

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