Volatility is one of the primary characteristics of the stock markets. Several factors like external and internal events can cause this volatility, which has a direct impact on the stock market performance. But can you measure volatility?
Using volatility index (VIX), investors can measure stock market volatility. But what exactly is VIX? Is it accurate? Read on to find out!
You will Learn About:
India VIX meaning
If you are new to the world of investing, it’s most likely that you are still getting familiar with terms like India VIX. So, what really does the term India VIX mean?
Simply put, India VIX measures the market’s expectation of volatility in the near term. In moments of volatility, the VIX or volatility index either climbs or falls, depending on how sharply the markets move up or down. A low index value indicates the absence of a fear factor in the market. Likewise, a higher index value indicates rising fear factors and uncertainties.
Take, for instance, a situation like lockdowns, elections, monetary policy, and geopolitical concerns can build stress in the market, as investors may not be able to foresee the outcome. During such times, the volatility index may climb up the ladder. Once the outcome is disclosed, the index generally stabilises.
If beta and standard deviation are used to measure the volatility of a stock, VIX is used to measure volatility of the market.
VIX: All You Need to Know
- VIX measures the volatility of the market.
- A high VIX denotes increased volatility and vice-versa.
- VIX is important for analysing the outcome of uncertain events and more.
- VIX is used by investors, hedge funds, and other market participants to analyse market mood and movements.
Moreover, you can also identify the VIX of stock exchanges like Nifty. How? Allow us to show you how –
What is Nifty VIX?
Nifty VIX is an indicator that demonstrates the volatility of the Nifty for the next 30 days or so. The higher the value of the Nifty VIX, the higher the anticipated volatility in Nifty.
The main correlation that remains between the Nifty and India VIX is that the former measures the direction of the market and is assessed based on the price movements of the underlying stocks, whereas the latter signifies the overall fluctuations in the market and is calculated as per the order book of the underlying index’s options.
How is VIX calculated?
The India VIX index is calculated by the National Stock Exchange (NSE) from the order book of Nifty options (it is based on top bid-ask quotes for the upcoming and following month’s Nifty options contracts).
The value of India VIX is derived by leveraging the Black and Scholes model. It is measured by using five variables of options contracts: strike price, the market price of the stock, volatility, expiry time, and the risk-free rate.
Image source: https://blog.investyadnya.in/
The India VIX values indicate the percentage change anticipated in the Nifty index. For instance, if India VIX is at 20, the Nifty can rise or fall by 20% from its current state over the next 12 months. This means if Nifty is presently at 19,500 and India VIX is at 20, then Nifty can drop to 15,600 or increase to 23,400 in the next 12 months.
To understand an accurate range for the next 30 days, check this formula:
(20/√(12)) * 19500
This gives us +/- 1010
This means that the Nifty 50 index can drop to 18490 or rise to 20510 in the next 30 days.
What does positive and negative VIX mean?
Positive Volume Index (PVI) and Negative Volume Index (NVI) help identify bull and bear markets.
PVI assumes that when volume increases, ‘the trend following uninformed investors’ are actively entering the markets. If the present volume is greater than yesterday’s, then PVI is given by –
PVI = Yesterday’s PVI +(Close – Previous day’s close/Previous day’s close *Yesterday’s PVI)
If the volume is lower than the previous day, then PVI is given by –
PVI = Yesterday’s PVI
On the other hand, if the volumes are low, NVI falls and vice versa. Values of NVI higher than their one-year moving average are most commonly perceived as bullish.
If the present volume is lesser than yesterday’s, then NVI is given by –
NVI = Yesterday’s NVI +(Close – Previous day’s close/Previous day’s close *Yesterday’s NVI)
If the volume is greater than the previous day, then NVI is given by
NVI = Yesterday’s NVI
As always, both indicators should be used in conjunction with other indicators and charts for complete analysis.
Importance of India VIX
India VIX helps investors understand the anticipated change and direction in the markets. This is particularly beneficial for those dealing in options and futures.
For example, in the pre-COVID-19 period, India VIX normal range remained below 30 (since 2014). However, since the pandemic broke out, the VIX surpassed the 30 levels and has been trading near 50 and even 80 for a few days.
The right analysis of India VIX and current economic trends can help one understand the market trajectory. So, anyone with a considerable investment in equities must keep a watch on the movement of India VIX and adjust their strategies accordingly. While short-term fluctuations in volatility may not influence the long-term profitability of long-term investments, if the extent of volatility increases in the long term, investors would need to reevaluate their investments entirely.
Overall, India VIX plays a critical role in identifying market sentiments. To understand the current mood of the market, use Tickertape’s Market Mood Index. It helps you understand if the market is in the fear zone or a greed zone.
Conclusion
India VIX is a volatility index that signifies market expectations for near-term volatility. It is a powerful indicator for determining the range play for the index. Historically, high VIX levels have always been followed by a significant movement in share prices and indexes. Not only that, even when it comes to option pricing, the premiums charged also fluctuate due to the VIX level changes. It is important that the traders catch changes in market volatility and adjust their equity investments.
