The stock market is the place where the price for stocks does not remain the same, hence the index levels also fluctuate accordingly. Sometimes it remains positive, sometimes negative and sometimes there is no movement. The same kind of price rise and fall happens with individual stocks. And this kind of unpredicted movement creates volatility in the stock market.
What is India VIX and How it Works?
The volatility index (VIX) is a type of parameter to measure the volatility of the index for a certain period. VIX is simply defined as – the rate and magnitude of price movements in the index of the stock market or any other. Volatility Index India means the volatility index calculated by and for the Indian stock exchange NSE of its main index Nifty50 for traders expect over the next 30 days.
VIX India is first introduced by the Chicago Board of Options Exchange for the US markets in 1993 based on S&P 100 Index option prices. While in India it is launched by NSE in the year 2008 helping traders and investors estimate the volatility of the index.
How India VIX is Calculated?
VIX is calculated using the Black & Scholes model that consists of five variables like market price of the stock, strike price, time to expiry, risk-free rate, and volatility of option contracts. All these variables are taken into account and calculated with a formula.
Though, the calculation of VIX India is a complicated process that requires special mathematical knowledge and experience to understand the entire process. However, to make you understand easily we are taking an example to explain how it is calculated.
For an example, let's take the main index of the Indian stock exchange Nifty 50
Suppose that VIX India today is at 100, it means that over the next 12 months, the Nifty 50 index can increase or decrease by 10% from its current level.
So, if Nifty is currently trading at 17,000, and VIX India is at 15, it means Nifty can fall to 14450 or rise to 19550 from now to the next 12 months.
And to get the accurate range for the next 30 days, apply this formula:
(15/√(12)) * 17,000.
This gives us +/- 736.
This means the Nifty 50 index can fall to 16,264 or increase to 17736 in the next 30 days
What does India VIX Indicate?
VIX is one of the best indicators showing the market for traders. When you see the India VIX chart it indicates intraday as well as short-term traders about how much the market is likely to rise or fall in the near term. Apart from short-term traders, long-term investors also get cues from VIX India before making any investment in the market.
Future and Option traders typically use the VIX India to decide whether buy or sell an option contract. And when VIX India is high trading into options becomes more attractive as buyers are likely to book more profits. And Option traders also earn high when VIX India is falling.
What Happens if India VIX Increases?
VIX increase or decrease indicates how much the market can move on either side. If VIX India is going down it means that people are bidding up the prices of calls relative to puts. While if VIX is increasing it indicates that people are bidding up the prices of puts compared to calls.
How to Use India VIX for Trading or Investing?
VIX India means volatility for the next 30 days and hence long-term investors don’t worry about the short-term price fluctuation resulting they are less affected by the movement in VIX India. The short-term or intraday movement of VIX India doesn't affect the profitability of long-term investments. But when India's VIX rises in the long-term it indicates there are uncertainties in the market and long-term investors are also likely to get affected by the VIX.
Alternatively, India VIX for trading is used by traders in options as a valuable tool while making options into any contract. When volatility is higher options become more valuable, hence options traders pay more attention to the fluctuation in VIX India.
In intraday trading, stock traders use the India VIX company as an indicative tool to set their stop loss or book profit. When volatility is high then the price of the stock of a company moves sharply and there is also a high chance of hitting the stop loss that needs to be adjusted from time to time to avoid major losses.
Why is VIX Important?
VIX India is playing a very important role in understanding the fear factor and confidence levels among traders. If we talk about the VIX India index of Nifty 50 means we can estimate the direction and movement of this index in a certain period, usually for 30 days.
The value of the index and the volatility of the index move parallel with each other. The higher value of India's VIX India indicates higher volatility expectations resulting there could be significant changes in Nifty while a lower value of VIX India means low volatility is expected.
It is playing a very crucial role when making the decision to buy a stock or index for the short to medium term. Higher the volatility then there is a high chance of moving the stock or index on either side. And traders especially those playing intraday or in the derivatives segment get the best profits during high volatility. But there are high chances of losses, and if volatility is low, traders don't get much chance to earn a high profit, while investors do not take it seriously.
How much India VIX is good?
Mostly VIX India hovers around 15, and traders or investors can expect these price fluctuations between the range of 15+ and 15- for the next 30 days. The VIX India oscillates between 15 to 35 percent and any value around 15% represents low volatility while volatility beyond 35 means there are high fluctuations in the market that can be risky for trading.
However, historically main index NIFTY 50 and volatility had shared a negative correlation. Whenever VIX rises, the Nifty falls, and when VIX India falls Nifty is in an upward trend. Hence VIX India around 15 is good for everyone and if VIX India moves close to zero it means either index can double or become 0, but VIX has the potential to revert to the mean.
VIX India is simply a volatility index to measure the expectations of the market toward volatility. It is one of the most influential indicators to estimate the expected price movement of stocks. Higher the volatility, the price of the share or index changes significantly. And plays an important role in determining the price and premiums of the derivatives contracts.
Using the Black-Scholes model you can find out the options process with the rise of volatility and falls with the decrease in the volatility only when everything remains the same. The best way to trade according to volatility is by buying and selling options.
But the negative aspect of this approach is practical in the real world, where all other things like time deterioration and stock prices do not remain the same while volatility is moving. At this point, it becomes difficult for traders to trade as per volatility in options. Hence, using the current India VIX trader’s trade in the market with much more efficiency and confidence.