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Is India Vix the next big thing for traders and investors? Don’t worry in this article, you will learn all about India Vix.
Indian VIX index is one of the most tracked indices in this country. Those who are investing or trading in the share market for a long time might be aware of it.
But for the new investors and people entering the share market through online trading, knowing about the Indian VIX index is very necessary.
What is India Vix?
The India VIX is a measure of volatility in the stock market. Volatility means how much the stock price may change within a short period of time and it also indicates the risk level. The higher the volatility, the riskier it is to invest or trade on that particular stock.
The India VIX is derived from the prices of options on the Nifty future to indicate how volatile the Indian market is likely to be that day. It is calculated based on inputs such as open interest, and volumes.
VIX is the fear index which people use to predict or estimate future stock prices. I call it Fear Index because when investors are fearful, they sell shares and Vix will be relatively high and vice versa.
It is used as a benchmark to keep track of investor sentiment in the markets.
The volatility index or Vix was started by Chicago Board Options Exchange (CBOE) for determining the fear in shares and as an indicator to predict the market’s movement.
When Indian investors fear that markets will drop, they tend to sell their shares before they lose more money. This leads to an increase in demand for options on index futures and a rise in implied volatility (Vix).
On the other hand, when investor confidence increases, we see less selling of equities and lower option prices with falling Vix values.
You can use this knowledge at any given time to predict what direction the market is likely heading towards by measuring changes in its volatility levels—the higher or lower it goes, the more volatile it becomes; hence, if you know how to read charts for these two metrics then you can easily trade your way into profit!
Interesting Fact: India VIX was developed by National Stock Exchange (NSE), a stock exchange organization based at Mumbai, India, to provide investors with a forward-looking indicator of expected stock market volatility for the next 30 calendar days.
Why is it so sensitive?
It measures the investor psychology about market value. It indicates whether investors are bullish or bearish in the share market.
The higher vix values indicate that investors expect greater volatility and a downturn of the prices while low VIX means that investors are optimistic about stock prices.
So when India Vix increases, it means investors are bearish and shares will fall down further. When India Vix decreases, it means investors are bullish.
Many traders also trade on this factor. They go short when Vix is high and long when it’s low.
Why do traders and investors need to know about India Vix
The India VIX index gives information about the market’s expectations regarding future volatility.
It is a useful tool for investors and traders to gauge market risk. If the volatility level is high that particular day, it can indicate high uncertainty in the market.
Higher levels of uncertainty could mean more price swings in periods between the current and the next option expiry.
Therefore, if you plan to enter a stock trade or invest in Indian shares or indices, then it is good for you to keep an eye on the India VIX as one of your tools to figure out whether market uncertainty (and therefore possible risk) has increased or decreased.
When VIX rises, investors get worried that stocks may go down further due to market uncertainty and this leads to panic selling.
In 2008 when the recession hit Indian markets, the market was very unstable and we saw a huge drop in stocks. Economists use this fear index to understand the market’s underlying health and predict future price swings.
The fear index in India is calculated based on options on the Nifty. In short, investors should care about volatility or fear index because higher VIX means higher volatility and lower VIX means lower volatility.
Purpose of India Vix
The Index is used by investors to hedge their portfolios against volatility in equity markets. Those who want to go short on stocks use this as a guide for selling options and futures contracts.
For example, If you have bought 100 shares of Stock ABC, and want to hedge your portfolio against volatility in the markets, you could consider selling call options or buying put options on ABC shares.
Similarly, those who are interested in going long would do the same thing in reverse.
This is a useful tool for market participants as well as risk managers because it gives them an idea of what investors think about current volatility in the markets.
This indicator measures investors’ sentiment towards stock market risk by tracking expectations for volatility in near-term returns. It has become popular among investors who believe that volatility is a valuable indicator of investor sentiment.
The Vix can be used as a risk gauge that reflects the potential for future stock fluctuations, making it an extremely useful tool for investors and advisors alike.
It indicates whether the market participants are optimistic or pessimistic about future prices.
The Vix measures both investor fear and greed in Indian stock markets. A level above 20 means investors are fearful, meaning they think a big drop in stock prices is more likely, and a reading below 20 means investors have seen greed take over, making them believe that stocks will go up.
The Vix is based on an implied volatility index. The Vix represents expectations for volatility over the next 30 days and is updated during market hours.
This indicator can be used by investors who believe it is one of the most accurate ways to measure investor sentiment.
- India Vix is a volatility index that measures the price movements of Indian stocks.
- The index was created by the National Stock Exchange of India and it is calculated on a daily basis
- The value of the Index can range from 0 to 100 with higher values indicating greater price volatility and lower values showing less price volatility
- If you invest in stocks with low India Vix numbers, your investment will be less risky and can grow faster than those with high India Vix numbers
- It indicates how much prices are expected to change over a 30-day period.
- It’s used by investors, traders, brokers and other market participants who are interested in tracking fluctuations in stocks during a single day or within any specified time period.
- The volatility index is used to track trends in stock market prices and investor sentiment
- It reflects both long-term and short-term expectations for share value, making it an important tool for investors
- Investing in stocks with low Indian Vix numbers is good for long-term investments because they are less volatile and have better growth potential
- Investing in stocks that have high Indian Vix numbers means greater risk but also has a chance to increase profits at a much faster rate
(Q1) What are the usual factors that affect India VIX?
(A) Some of these factors are:
- Economic Data
- Political Events
- Company News
- Earnings Releases
(Q2) What are the practical uses of India vix?
(A) India VIX can be used to hedge risk, trade volatility and can also be used for predicting the market.
(Q3) What is the objective of India VIX?
(A) The main objective behind introducing India VIX was to provide transparency in Indian Capital markets and make investors aware of volatility prevailing in the market. It also aims to provide an indication of return expectations, based on historical volatility.
(Q4) What do option traders do with India VIX?
(A) Option traders can use India VIX to determine a fair price for options because high levels of India VIX indicate that prices may move dramatically overnight. Theoretically, all other things being equal, options are expected to trade at a higher price when India VIX is high.
(Q5) Will India vix always be profitable?
(A) It’s difficult to answer this as so many factors decide its profitability.
India Vix is a sensitive index, which provides information about the volatility of the Indian equity market.
It reflects prices movements in stocks that are listed on NSE. Traders and investors need to know about it because it helps them understand how volatile the stock markets will be for a particular time period.
They can also use this knowledge to make informed decisions about their investment strategies or trading plans for a certain duration of time frame.
Let me know if you need more information about volatile markets or have any other questions I might not have covered here!