- If you have been looking at share market movements, you might have come across the term
India VIX . - India
VIX is used as one of the indicators by traders, especially those dealing in options, to understand how to place their bets. - But what exactly is India VIX and should you care about it?
- We try to break down this concept into simpler words to help you understand what India VIX is and why it is important.
We have all heard “the stock markets are so volatile these days” or something similar, more so over the past two years. While volatility has remained elevated since the last few weeks, more often than not, the surge has been around key national and global events.
As the chart above shows, India VIX surged multifold rapidly in March 2020 – it kept up pace with the rapid surge in Covid cases in the country, and peaked when the government announced the first nationwide lockdown.
The volatility returned to its normal range several months later. By August 2020, it came back under 20, which is usually where it has remained, barring a few exceptions.
But all that’s fine, what exactly is India VIX? Let’s decode it together and understand what exactly does India VIX mean and why it is important.
Simply put, VIX is short for Volatility Index. India VIX was introduced by NSE in 2003. It is based on the simple concept of how rapidly and unpredictably the Nifty 50 index is expected to change in the next 30 days.
It is worth noting that volatility doesn’t just mean price falls – it’s also related to upward trends.
A higher India VIX means higher unpredictability and volatility, while a lower number suggests the market trends are more predictable.
In simpler terms, higher the VIX, more the fear in the market. Lower the VIX, lower the fear.
India VIX is calculated using the Black & Scholes model. It is measured using five variables of options contracts for the near and next month – these variables are strike price, market price of the stock, time to expiry, risk-free rate, and volatility.
The VIX values represent the percentage change expected in the Nifty 50 index.
For example, if India VIX is at 20, it means the Nifty 50 index can increase or decrease by 20% from its current level, over the next 12 months.
So, if Nifty is currently at 17,500, and India VIX is at 20, it means Nifty can fall to 14,000 or rise to 21,000 from now until the next 12 months.
To get a precise range for the next 30 days, use this formula:
(20/√(12)) * 17,500.
This gives us +/- 1,010.
This means the Nifty 50 index can fall to 16,490 or increase to 18,510 in the next 30 days.
India VIX helps traders understand the direction and the expected amount of change that is expected in the Nifty 50 index. This is especially useful for those dealing in futures and options.
However, even a cursory look at India VIX and an understanding of the ongoing economic trends can help one get a brief idea about the market trajectory in the short term.
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