India VIX is a volatility index introduced by NSE in 2008, and it is based on the money Options of Nifty. In simple terms, India Vix tells how many traders expect Nifty to move in the near term. If the nifty VIX or India VIX is higher, it means traders can assume a sharp movement in the Nifty in the upcoming days. However, if the Vix nifty or India Vix is lower, it means traders can assume that the markets will be mostly stable.
What is the Volatility Index?
The Volatility Index measures the degree of volatility or fluctuation traders expect over the near term. When there is a lot of uncertainty in markets(for example the corona epidemic situation), the market will move up or down, and the volatility index will start rising. As volatility subsides, the volatility index declines. Also, remember volatility index and Nifty Index are not the same. Volatility Index is in percentage, while Nifty index is calculated using the underlying 50 stocks’ price movement.
Volatility Index is calculated using the order book of the underlying index options and is indicated as an annual percentage. The concept of the Volatility Index was initially introduced by The Chicago Board of Options Exchange (CBOE) in the year 1993 for the US markets. In the year 2003, a new volatility index was introduced and is based on S&P 500 Index options.
What is India Vix and How is it analyzed – Fear Index
India Vix is a volatility index based on the NIFTY index and describes how many traders assume that the NIFTY will move in the near term.
For example, recently, India Vix shot up to 30% when Nifty price was 20000 around. It means traders assume that the Nifty will move by +30% or -30% in the next 1 year. However, India Vix is mainly used to assume the expected volatility in the near month. If the Annual Volatility is expected to be high, then the monthly volatility will also be high.
Vix is also named as a Fear gauge or Fear Index. India Vix indicates how nervous traders are. When traders are nervous about the market falling too much, they hedge positions by buying out of the money options.
Now we all know that when demand for the market increases, its price increases. So, more traders want to buy out of the money options at higher premiums. Since Vix is estimated using out-of-money options premium, Vix also increases. Hence it’s also called the Fear index.
Historical Range of VIX
In the below diagram, we see the historical price of India Vix from may 2021 to 2022
How Does India Vix change with Nifty 50 Price movement
Usually, when Nifty 50 falls, Vix will increase, and traders will go and buy out of money (OTM) put options for safety. When Nifty50 remains constant or increases slowly, traders are happy and don’t want to buy out of money for safety.
If the Nifty 50 rises, VIX will decrease, and traders may buy puts to protect their profits when there is a sharp movement in Nifty, VIX increases, and the Out of money options premium increases.
When the assumption of falling is higher, VIX increases more than the assumption of rising.
How can you use VIX for Investing and trading?
The expected volatility will impact both traders and investors. Traders and investors use VIX data to protect their portfolios or open positions. Long-term investors can move from sensitive to defensive sectors if Vix rises.
For example, if the Vix is expected to increase and remain high, the trader or investor may move from high beta sectors like financials to defensive sectors like FMCG and Pharma.
India Vix is also traded in the futures markets. So traders who assume that the volatility increases can buy India Vix futures, and traders who assume volatility to go down can sell India Vix futures.
Vix indication shows you the trading range.
- When you take short positions and Vix rises, you can expect more downward and carry shorts.
- If vix increases and stays high, you can continue shorts.
- If vix is decreasing, you can sell OTM options to make money.
When Vix is low, Option prices are low. Usually, traders take net-long premium strategies. Similarly, when vix is high, traders usually take Net short premium strategies in options.
Click to view the India vix live chart. You can also find India vix live data or India vix chart on nseindia website under the indices section.
NIFTY range based on VIX
As we already discussed, India VIX is nothing but expecting the annual volatility of a nifty index. Based on the volatility, you can find the monthly, weekly, and Daily expected range of Nifty. All this can be done using our intraday screener app (Nifty Expiry Analysis)
Using this data, you can start selling Weekly, Monthly, and out the money options above or below the Nifty range.