Market volatility is a concern for investors who invest in the money market. They know that it can affect their returns. Investors must quantify volatility in order to understand the impact of market volatility on their investment decisions. How can you measure market volatility? Here's where a volatility index comes in. It measures volatility changes and benchmarks market volatility. India VIX, a volatility index in Indian bourses is used as a market indicator.
Volatility is a term that refers to unpredictability in periods when security prices fluctuate rapidly. People often associate volatility with price drops. It can also occur in an uptrend.
What causes volatility? Market movement can be caused by many factors, which are outlined below.
Stock prices experience periods of uptrends or downtrends, depending on external and internal factors. Volatility is normal over the long-term. These phases are not only unsettling, but they cannot be avoided.
India VIX is the India Volatility Index. It is a measure of the volatility traders anticipate for the next 30 days in the NSE Index. It is simply a calculation of the price swings investors anticipate in the market, rather than important market news. Investors are more likely to invest if the index's value is low. This indicates that there is no fear factor in the market. A higher index value indicates rising uncertainty and fear factors.
India VIX was introduced to the market in 2008. However, the volatility index first appeared on the Chicago exchange in 1993. It was used to gauge market fear factors.
India VIX is NSE's moniker for the volatility index. It takes into account five variables: strike price, market price of stock, expiry day, risk-free returns and volatility. VIX is a measure of investor volatility. It takes into account the best bid-and-ask quotes from the NIFTY options contracts, which are out of the market, current, and near-month.
Volatility and VIX move in opposite directions. Higher VIX means more volatility in the market. A lower VIX signifies low volatility in NIFTY.
Let's look at an example to help us understand.
Let's say that VIX value is 15. This means that investors can expect prices to fluctuate between +15 and -15 over the next 30 days. The VIX oscillates between 15 to 35, according to the theory. A value below 15 indicates low volatility, while values above 35 indicate market fluctuations. The negative relationship between VIX and NIFTY was evident in the past. VIX fell below 15 every time NIFTY rose.
India VIX on the stock market indicates whether investors feel fearful or complacent in short-term, a sign of market choppiness.
India VIX is crucial for understanding market choppiness and investing. India VIX is crucial for investors to determine their confidence and fear.
A lower VIX indicates low volatility and a stable range of asset prices.
A higher VIX indicates high volatility and lack of confidence by investors to trade within the current market range. It is usually an indicator of significant market direction and a broadening of current range.
The positive correlation between volatility and India VIX means that when volatility is high the value of India VIX will also be high. India VIX, for example, was below 30 in 2014 pre-COVID, which indicates stability. India VIX reached 50 after the pandemic. The equity index experienced a 40% decline in its value, and was traded at the 8000 level.
It is important to keep in mind that India VIX does not indicate trend direction. It captures volatility factors that are rising or falling. Investors with greater exposure to equities should keep an eye on India VIX's price.
There have been periods of extreme volatility, and there were times when the market moved within a narrow range. India VIX tends to return to its mean of 15-35. India VIX can even reach zero. The index could double or reach zero in this case.
VIX measures near-term volatility over a 30-day period. It calculates VIX using options that expire in the current month and those that expire in the next month. It assumes that the option premium at NIFTY, also known as strike price, is an indication of implied volatility in the overall market.
India VIX uses the average of NIFTY options' order books as a measure of market volatility. You don't have to know the complex statistical formula. To plan trades, you need to understand the implications of this formula.
Let's look at an example to show how options writers use VIX values when writing contracts. Let's say an options writer decides that he will write a contract worth Rs 275 for ABC stocks at a current price Rs 310. He intends to sell 3000 shares at Rs 10, premium, with a contract expiring in seven days. Contract prices could fall to Rs.230 in just two days due to market volatility. His loss will be after five days.
Strike price Rs. 275
Spot price Rs. 230
Premium Rs 10
He loses Rs (230+10), Rs 275 or R 35. His total loss amounts to Rs 105,000 per lot. He will, therefore, avoid entering into a contract and charge a premium if he does.
India VIX is an index that measures volatility in the market. It can be used to predict the stock market's expected price movements. High VIX values have historically been associated with significant shifts in share prices and indices. It is also crucial in determining the prices and premiums for derivative contracts.
You now have information about India VIX. Trade with confidence.