India VIX is one of the important data points for all options traders. Many options traders use India VIX to get an idea about the current volatility in the market. In today’s blog, we are going to understand in detail about India VIX and what traders can interpret by analyzing the India VIX.
India VIX is a volatility measurement index that is based on the option prices of the Nifty. It is basically measured by using the best bid-ask quote of out-of-the-money present and near-month option contracts. The idea of India VIX is derived from the Chicago Board of Exchange, the first exchange in the world that invented the idea of volatility index back in 1993.
India VIX tells us about the traders’ point of view about the market volatility for the next 30 days. For example, consider the value of India VIX as 20.00, so we can expect an annual change of +20% to -20% & for the next 30 days.
If you want to calculate the expected monthly volatility of Nifty for the next month & consider the price of the India VIX to be 20, then you have to divide 20 by the square root of 12. So by calculating this, we get an answer of 5.78. So we can expect the Nifty to trade between +5.78% to -5.78% for a month.
Keep in mind that we are not going into detail about the mathematical formula which is used to calculate the India VIX as it is not required.
As we discussed earlier, India VIX is one of the important data points for all options traders as it gives important information about the volatility and fear in the market.
Generally, When India VIX is high, higher is the fear, and higher are the option prices. When India VIX is low, lower is the expected volatility, and lower are the option prices. During special events like Election Results, Budget day, or War, India VIX rises sharply, which indicates higher expected volatility.
When there are special events, then option prices automatically rise as there are chances of higher volatility in the market, and as a result, India VIX also rises. A practical example of this would be the Budget day of 2022 when India VIX crashed after the declaration of the budget, and as a result, all the option prices crashed too, and that resulted in a loss for option buyers.
If you observe carefully when the market rises sharply, India VIX will not increase too much. On the other hand, when there is a sudden fall in the market, the India VIX will rise sharply because in the market, fear is always of the downside, not of the upside, and hence VIX increases sharply when there is a sudden fall. During the Corona fall of 2020, India VIX shot up to 86, and that too within a very short period of time due to sudden panic in the market.
So by the above data, we can conclude that when there is high volatility, India VIX increases, and option prices are also overpriced due to the high volatility. On the other hand, when the value of India VIX is lower than usual, then the market expects lower volatility, and as a result, option prices are also underpriced.
By considering the India VIX, traders can get a rough idea of the expected volatility of the market and according to that, they can design their trades. For example, if India VIX is shot up and you think that it will come down, then you can use short option strategies like Short strangle or short straddle.
On the other hand, if you think that there can be a big move in the market on either side and also if India VIX is low as compared to recent days value, then you can take Long IV positions such as long strangle, long straddle, etc. In this way, by understanding general market conditions and analysing India VIX, you can design your trades.
I hope that through this article, you understood the concept of India VIX and how one can initiate trade after analysing market conditions and by taking into account India VIX. If you like this article, don’t forget to share this across all your social media handles.
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