How investors can prepare for market volatility with India VIX

Volatility and uncertainty are an inherent part of investing in the stock market. However, there are some tools that can help investors estimate and project volatility trends and market movements.

While they can never be foolproof, such metrics can help investors be more prepared for such ups and downs and plan their investment strategies accordingly.

One such important tool is the India VIX or volatility index. But what exactly is India VIX and why is it so important for traders and investors?

This article simplifies the concept of India VIX, how it is calculated and how you can use it for trading. By the end, you'll have a clear understanding of this vital market indicator.

• Table of contents

1. Understanding India VIX
2. Calculation of India VIX
3. Why is India VIX important
4. How India VIX is different from Nifty
5. How to use India VIX for trading?
6. Volatile stocks in India
7. What is India VIX in stock market?

Understanding India VIX

India VIX, or the India Volatility Index, measures the expected market volatility over the next 30 days. It is essentially an indicator of the market’s fear or confidence level. Higher values of India VIX signify more uncertainty and fear in the market, while lower values indicate relative stability and confidence.

A measure of market volatility, India VIX is calculated by the NSE using the order book of NIFTY options. It’s based on the best buy and sell quotes of NIFTY options contracts for the current and next month.

Calculation of India VIX

India VIX is not like regular indices such as Nifty, which are based on stock prices. Instead, it is calculated using Nifty options data. It uses an amended version of the computation methodology of the Chicago Board Options Exchange or CBOE Volatility Index that has been adapted to the Indian context. Here are some of the factors it considers:

• Strike price: The price at which an option can be bought or sold
• Time to expiry: The time left until the option contract expires, measured in minutes for accuracy
• Risk-free interest rate till expiration
• Forward index taken as the latest available price of NIFTY futures contract of corresponding expiry.
• Bid-ask prices: Taken from Nifty options contracts to calculate the index.

A higher India VIX means more market volatility, while a lower value suggests a calmer market.

Why is India VIX important

India VIX reflects the level of risk or uncertainty among investors.

High India VIX: It indicates that the market expects significant fluctuations or sharp movements in the near future, signalling a period of high volatility.

Low India VIX: It means that investors anticipate stable and minor changes in the market. It essentially acts as a barometer for market sentiment, showing how uncertain or calm the market feels.

How India VIX is different from Nifty

While India VIX measures expected market volatility, Nifty indices reflect the actual price movement of securities listed on the NSE on a trading day. Interestingly, India VIX has often been observed to be moving inversely to Nifty50. For example, when Nifty rises, India VIX usually declines, indicating reduced fear. On the other hand, when Nifty falls, India VIX tends to rise, signalling increased uncertainty. Understanding this difference can help investors market behaviour and make informed decisions.

How to use India VIX for trading?

For trading:

1. Volatility indicator: A rising VIX suggests increased market fear and possible corrections, while a falling VIX signals stability.

2. Contrarian indicator: Extreme VIX levels can indicate market reversals. A very high VIX may signal a buying opportunity, while a very low VIX could suggest complacency.

3. Options trading: High VIX leads to expensive option premiums; traders can sell options. Low VIX makes options cheaper resulting in opportunities for buying options (calls/puts)..

4. Hedging strategy: A rising VIX suggests uncertainty, so traders may hedge their portfolios with options or defensive assets.

For investing:

1. Market sentiment gauge: High VIX suggests bearish sentiment; low VIX indicates bullish conditions. Investors can accordingly use this information to plan their long-term entry points.

2. Portfolio risk management: Rising VIX signals increased risk; investors may reduce equity exposure or shift to defensive sectors (FMCG, Pharma, Gold).

3. Timing investments: Investors can use high VIX periods to accumulate quality stocks at discounted prices.

4. Diversification strategy: A consistently high VIX environment suggests the need for portfolio diversification into bonds, gold, or international equities.

Volatile stocks in India

Some stocks are naturally volatile, constantly going up and down in price. While some investors prefer to steer clear of this unpredictability, others see it as a chance to take risks for potentially big rewards.

Volatility simply measures how much a stock's price changes over time. The more volatile a stock is, the riskier it becomes—but that also helps investors gauge possible future price swings.

What is India VIX in stock market?

India VIX is an important tool in the stock market to gauge volatility. Instead of tracking stock prices, it measures the expected movement in Nifty index prices over the next 30 days. When India VIX is high, it usually means the market is experiencing or expecting a downturn. On the other hand, when India VIX is low, it indicates the market is stable or on an upward trend.

Conclusion

India VIX is a key tool for anyone investing in the Indian stock market. It gives insights into market sentiment and helps traders manage risks. By learning how India VIX is calculated and how it relates to Nifty, you can use it to make better trading and investment decisions.

FAQs

What is India VIX index?

India VIX is a volatility index that measures the market's expectation of volatility in the Nifty index over the next 30 days. Tracking India VIX helps investors handle market ups and downs.

What does it mean when VIX goes down?

When VIX goes down, it indicates reduced market volatility and higher investor confidence.

What does a high VIX mean?

A high VIX suggests increased market uncertainty, fear, or risk, often leading to significant price fluctuations.

How to read VIX in India?

A low VIX indicates market stability, while a high VIX signals potential volatility. Traders use these levels to adjust their strategies.

What Is the full form of VIX?

The full form of VIX is Volatility Index.

What does India VIX indicate?

India VIX indicates the expected market volatility based on Nifty 50 option prices. It reflects the market’s sentiment, whether bullish, bearish, or neutral.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.