India VIX - What is India VIX?
VIX aka Volatility index is an index used to measure the near term volatility expectations of the markets. VIX is also a trademark of Chicago Board Options Exchange (CBOE), who introduced volatility as an asset class in the form of an index in 1993. Post its launch and immense popularity over the years, CBOE in 2004 introduced VIX derivative (F&O) trading.
Volatility index and Market index are completely different. While market index measures the direction of the market and calculated by the price movements of the underlying stocks, Volatility Index measures the volatility of the market and is calculated using the order book of the underlying index’s options. Another difference is that market index value is a number whereas the volatility index is an annualized percentage. The volatility index based on the order books of Nifty opinions is known as India VIX.
Why is India VIX important?
India VIX or India Volatility Index was launched by the National Stock Exchange (NSE) in 2008 followed by NVIX Futures in 2014. Volatility indices like VIX and India VIX are commonly believed to replicate the mean reversion of the value through the fluctuation around a long-term variance.
India VIX is the index indicating the Indian market’s volatility from the investor’s perception. It is calculated based on a methodology similar to that used by CBOE which includes the best bid-ask quotes and expected volatility figure for the next 30 days with some amendments to suit and adapt the options order book of NIFTY.
Volatility and the value of India VIX move parallel. A higher value of India VIX indicates higher volatility expectations, i.e. a significant change in Nifty and a lower value of India VIX indicates lower volatility expectations, i.e. a minimal change.
India VIX also has a strong negative correlation with Nifty. Every time India VIX falls, Nifty rises and when India VIX rises, Nifty is bound to fall. Considering historical data, India VIX soared to peak a few days before Nifty touched a bottom post-Lehman crisis.