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Should You Be Worried About Your Trade if You're Not Watching India Vix?

Traders use different tools and aspects of technical analysis. Investors use different parameters of fundamental analysis to manage their investments.

But traders and investors keep a close on India Vix (Volatility Index) because volatility variations can also drastically vary their profits/losses.

Then it is essential to know how this volatility is assessed for any stock market participant. India Vix is the index that indicates the volatility in the Indian market conditions.

This concept of the Volatility Index (VIX) was taken from the Chicago Board (CBOE), and NSE has taken a license to represent the volatility as India Vix.

India VIX Today Live Data

Click on any of the below links to know the current India Vix Levels.

Trading and Investing in Nifty and Banknifty using India VIX

What is India VIX?

India VIX is an index that provides a real-time measure of the expected volatility of the NIFTY-50 Index. It is computed using the bid-ask quotes near and the subsequent month of out-of-the-money options on the NIFTY50.

India VIX represents market participants' expectations for the level of volatility over the next 30 days. An increase in the index value indicates an increase in the expected volatility and vice versa.

Why is India VIX important?

Implied volatility (IV) is one of the most important inputs while constructing an options strategy. IV, along with Strike Price and time to expiry (TTM), helps us understand the demand & supply situation in the options market, which further aids in deciding whether to buy or sell an options contract.

A higher IV indicates that the option is expensive (demand for option is high). In comparison, a lower IV indicates that the option is cheap (demand for option is low).

Along with these parameters, traders and investors use India Vix to gauge market sentiment. A higher India VIX value indicates that the market participants expect higher volatility in the near future and vice versa.

How is India VIX calculated?

India VIX is calculated using the prices of out-of-the-money options on NIFTY50. There are four main elements that are considered when calculating the India VIX. These elements are time to expiry, risk-free interest rates, forward index level (Nifty future contract price level of the corresponding expiry), and bid-ask quotes of OTM contracts.

A proprietary formula is used to calculate the India VIX value from the weighted average of squared volatility of all the options used in the calculation. This final value is then annualized to express it on a per-annum basis.

Nse India mentions this formula to calculate India Vix.

Image - India Vix Calculation Formula
Image - India Vix Calculation Formula

How is India VIX different from historical volatility (HV)?

Historical volatility (HV) measures how much a security's price has fluctuated over a certain period of time. It is calculated using past price movements and expressed as a percentage.

On the other hand, India VIX is a forward-looking measure of expected volatility and is not based on past price movements.

What is the Normal Range of India VIX?

Most of the time, India Vix oscillates between 15-35.

If the India Vix level is below 15, it is considered low volatility; if the India Vix level is above 35, it is considered high volatility.

Correlation Between India VIX and Nifty-50?

Investors also recognize the India Vix as Fear Index. Because it shoots up when the Nifty starts to fall and displays a sideways to downside move when the Nifty is going up.

Image - Correlation Between India Vix and Nifty-50 (India Vix Historical Data)
Image - Correlation Between India Vix and Nifty-50

The above chart plots the comparison between India Vix and Nifty-50 for 11 years of historical data.

From 2016 to 2020, Nifty moved up, and India Vix Stayed within the range of 12-to-22.

But during the 2020 pandemic period, Nifty fell from 12150 levels to 8592. At the same time, India Vix shoots up from 11-to-64.

After the post-pandemic period, Nifty again shoot up to its original level. Interestingly India Vix also cooled down from 64-to-16.

This clearly indicates sideways to falling India Vix supports bulls and the rising India Vix clearly supports the bears.

Let us look at some of the intraday level charts to understand the correlation between India Vix and Nifty.

Image - India Vix vs Nifty Correlation (30-Sep-2022)
Image - India Vix vs Nifty Correlation (30-Sep-2022)
Image - India Vix vs Nifty Correlation (21-Oct-2022)
Image - India Vix vs Nifty Correlation (21-Oct-2022)

Image - India Vix vs Nifty Correlation (4-Oct-2022)
Image - India Vix vs Nifty Correlation (4-Oct-2022)

Image - India Vix vs Nifty Correlation (28-Sep-2022)
Image - India Vix vs Nifty Correlation (28-Sep-2022)

The above intraday charts between Nifty-50 and India Vix also indicate that a fall in Vix supports an uptrend, and a rise in vix helps the downtrend.

How can I trade in India VIX?

You cannot directly trade in India VIX as it is not a traded instrument. However, a simple way to indirectly take a position in India VIX is by trading exchange-traded funds (ETFs), which are linked with the volatility index.

We do share live intraday options trades on our Telegram Channel, to know more, you can join here - Traders Group Run by Indrazith


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