INDIAVIX_IS IN UPTREND_BOUNCE FROM FIB LEVEL
India VIX is critical for understanding market choppiness before investing. Since all significant directional market movements are preceded by market choppiness, India VIX plays a crucial role in determining the confidence or fear of the investors.
A lower VIX signifies low volatility and a stable range for the asset price.
A higher VIX implies high volatility and a lack of confidence among investors to trade in the current market range. Usually, it is an indication of a significant directional movement in the market marked with the broadening of the current range.
Volatility and India VIX share a positive correlation, which means when volatility is high, the value of India VIX is also high. For example, in the pre-COVID situation, India VIX was significantly low at below 30 since 2014, indicating stability. But since the outbreak of the pandemic, India VIX value reached 50. During the same period, the equity index lost nearly 40% of its value and traded at the 8000 level.
However, a crucial point to remember is that India VIX doesn’t indicate trend direction. It only captures rising or falling volatility factors. Hence, investors with higher exposure to equities keep a close watch on India VIX’s value.
There are instances of extreme volatility and periods when the market moved in a tight range. But India VIX has a tendency to fall back to its mean, between 15-35. There can also be a situation when India VIX reaches zero. In this situation, the index can either double or come to zero.
Planning trade around VIX
VIX measures near term volatility for a period of 30 days. Hence, it uses options with the current month expiry and next month for calculation. It assumes that option premium at the strike price as NIFTY is a reflection of the implied volatility of the overall market.
India VIX considers averaging the order book of NIFTY options as a good measure of market volatility. It uses a complex statistical formula, which you don’t need to learn. But you must understand what it implies to plan trades.
For day traders, India VIX offers a good measure of market risk. It gives traders an idea of when stock prices go up or down when market volatility changes. For example, when the VIX value rises, intraday traders run the risk of triggering their stop loss level. Accordingly, they can reduce their leverage or increase stop loss.
Long term investors don’t bother about short term volatility, but in the long run, rising India VIX gives a fair measure of increasing uncertainties when institutional investors can raise their hedge by going heavy on put options to play the market.
Options traders depend heavily on the volatility metrics for buy and sell decisions. For instance, when volatility rises, options become more valuable and rewarding for buyers. Conversely, in times of low volatility, options tend to lose their value as they reach the expiry.
There are few ways to trade volatility. Traders can buy straddles or strangles when market volatility rises. But this trading strategy is expensive. Hence, as an alternative, one can go heavy on futures on the VIX index without worrying about market direction.
India VIX and NIFTY share a negative correlation. When plotted on a timeline of nine years since the inception of VIX, NIFTY reflected an opposite movement. Hence, when the VIX value is low, NIFTY rises and vis-a-vis. It gives investors a fair idea of market behaviour.
When India VIX value peaks, portfolio and mutual fund managers increase their exposure in high Beta portfolios. Similarly, they would select low Beta stocks when the VIX value is low.
India VIX is critical for options writers. High VIX value presents options writers with an opportunity of unlimited risk and limited rewards (premium). As the market passes through a phase of high volatility, out of money options contracts can turn into an at the money or even in the money contracts in a matter of few trading sessions.
Conclusion
India VIX is a volatility index to measure the market’s expectation of volatility. It is a powerful tool to gauge the expected price movement of stocks. Historically, high VIX values were followed by a significant shift in share price and indices. It also plays a critical role in determining derivative contract prices and premiums.
Now that you have learned about India VIX meaning go ahead trade with confidence.
A lower VIX signifies low volatility and a stable range for the asset price.
A higher VIX implies high volatility and a lack of confidence among investors to trade in the current market range. Usually, it is an indication of a significant directional movement in the market marked with the broadening of the current range.
Volatility and India VIX share a positive correlation, which means when volatility is high, the value of India VIX is also high. For example, in the pre-COVID situation, India VIX was significantly low at below 30 since 2014, indicating stability. But since the outbreak of the pandemic, India VIX value reached 50. During the same period, the equity index lost nearly 40% of its value and traded at the 8000 level.
However, a crucial point to remember is that India VIX doesn’t indicate trend direction. It only captures rising or falling volatility factors. Hence, investors with higher exposure to equities keep a close watch on India VIX’s value.
There are instances of extreme volatility and periods when the market moved in a tight range. But India VIX has a tendency to fall back to its mean, between 15-35. There can also be a situation when India VIX reaches zero. In this situation, the index can either double or come to zero.
Planning trade around VIX
VIX measures near term volatility for a period of 30 days. Hence, it uses options with the current month expiry and next month for calculation. It assumes that option premium at the strike price as NIFTY is a reflection of the implied volatility of the overall market.
India VIX considers averaging the order book of NIFTY options as a good measure of market volatility. It uses a complex statistical formula, which you don’t need to learn. But you must understand what it implies to plan trades.
For day traders, India VIX offers a good measure of market risk. It gives traders an idea of when stock prices go up or down when market volatility changes. For example, when the VIX value rises, intraday traders run the risk of triggering their stop loss level. Accordingly, they can reduce their leverage or increase stop loss.
Long term investors don’t bother about short term volatility, but in the long run, rising India VIX gives a fair measure of increasing uncertainties when institutional investors can raise their hedge by going heavy on put options to play the market.
Options traders depend heavily on the volatility metrics for buy and sell decisions. For instance, when volatility rises, options become more valuable and rewarding for buyers. Conversely, in times of low volatility, options tend to lose their value as they reach the expiry.
There are few ways to trade volatility. Traders can buy straddles or strangles when market volatility rises. But this trading strategy is expensive. Hence, as an alternative, one can go heavy on futures on the VIX index without worrying about market direction.
India VIX and NIFTY share a negative correlation. When plotted on a timeline of nine years since the inception of VIX, NIFTY reflected an opposite movement. Hence, when the VIX value is low, NIFTY rises and vis-a-vis. It gives investors a fair idea of market behaviour.
When India VIX value peaks, portfolio and mutual fund managers increase their exposure in high Beta portfolios. Similarly, they would select low Beta stocks when the VIX value is low.
India VIX is critical for options writers. High VIX value presents options writers with an opportunity of unlimited risk and limited rewards (premium). As the market passes through a phase of high volatility, out of money options contracts can turn into an at the money or even in the money contracts in a matter of few trading sessions.
Conclusion
India VIX is a volatility index to measure the market’s expectation of volatility. It is a powerful tool to gauge the expected price movement of stocks. Historically, high VIX values were followed by a significant shift in share price and indices. It also plays a critical role in determining derivative contract prices and premiums.
Now that you have learned about India VIX meaning go ahead trade with confidence.
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