VIX, India Vix, India Vix Chart, India Vix Index, India Vix Futures, Volatility Index, Nifty Vix, NSE Vix, India Vix Options, Vix index india, NSE Volatility, Implied Volatility

India Vix vs Nifty

September 5, 2010

India Vix, India’s Volatility Index, shows negative correlation with the Nifty which makes it a great hedging tool. I tried to find out the correlation between these two indexes. For the year 2010, the correlation comes out to be -0.92. So, traders can almost perfectly hedge there positions in nifty. However, the hedging strategies can only be finalised once the Futures and Options in indiavix are introduced by NSE. It will depend on the lot size of india vix and other parameters like liquidity and margin requirements etc. The Vix options in US markets are great hit and i hope the same for indian markets aswell.

India Vix Historical Data Compared with Nifty Historical Data

India Vix Historical Data is available on the NSE website at http://www.nseindia.com/content/vix/hist_vix_data.htm

Correlation = – 0.92

Date Nifty India Vix Nifty Change India Vix Change
4-Jan-10 5232.2 23.73 NA NA
5-Jan-10 5277.9 22.21 0.87% -6.41%
6-Jan-10 5281.8 22.1 0.07% -0.50%
7-Jan-10 5263.1 22.29 -0.35% 0.86%
8-Jan-10 5244.75 22.41 -0.35% 0.54%
11-Jan-10 5249.4 22.45 0.09% 0.18%
12-Jan-10 5210.4 22.96 -0.74% 2.27%
…… …… …… …… ……
…… …… …… …… ……
30-Aug-10 5415.45 18.36 0.12% -6.47%
31-Aug-10 5402.4 18.47 -0.24% 0.60%
1-Sep-10 5471.85 16.7 1.29% -9.58%
2-Sep-10 5486.15 16.15 0.26% -3.29%
3-Sep-10 5479.4 15.86 -0.12% -1.80%
Date Nifty India Vix Nifty Change India Vix Change
4-Jan-10 5232.2 23.73 NA NA
5-Jan-10 5277.9 22.21 0.87% -6.41%
6-Jan-10 5281.8 22.1 0.07% -0.50%
7-Jan-10 5263.1 22.29 -0.35% 0.86%
8-Jan-10 5244.75 22.41 -0.35% 0.54%
11-Jan-10 5249.4 22.45 0.09% 0.18%

Further Readings

India Vix Basics

India Volatility Index Calculations

How India Vix is related to Nifty Options

Future of India Vix Futures

Vix and Options

August 27, 2010

In this article, I am going to discuss the relation between the volatility index (VIX) and the options pricing. If you are aware of the Black Scholes model of options pricing, the call and put options pricing is dependent on following factors –

1) Price of the underlying
2) Strike price
3) Risk free rate of interest
4) Time to expiry
5) Volatility

Out of these five factors, first four are factual in nature. You know the price of the underlying, strike price, risk free rate of interest, time to expiry at the time of writing an option. What you don’t know is the volatility in the near future and thus it is somewhat subjective in nature and derives from the anxiety or fear of the option writer. This volatility is called implied volatility and it reflects the sentiment of a option writer. If the option writer thinks that in the near future the volatility is going to be high, he would demand higher premium for writing an option and thus the prices of the options will be higher. On the other hand if he thinks the volatility is going to be lower, he will demand lesser premium for the options and thus lower option prices.

Now if we consider all the option writers present in the market. There would be millions of such people and if we try to calculate the average volatility from the options they have written, we can get a value which can describe the overall sentiments of the market about volatility. This is what Volatility Index really tells us. It uses the prices of the options to guess the future volatility, ofcourse, after doing several other operations as well but in a nutshell, it is the reverse process of option pricing taken all the options being traded into account and thus calculating the sentiment of the entire market. You can read the exact method of calculating India VIX here.

Now what does a particular value of the India VIX indicates? The value of India VIX at the time of writing this article is 19.63 which means people are thinking that over the next 30 days markets can move up or down by 5.67% [19.63 divided by square root of 12] and demanding premium as per this value. Low value of VIX indicates stability in the market while higher value indicated stress, fear and anxiety. Since, the investors are more fearful of the downside, VIX is negatively correlated to the stock market index like Nifty or Sensex which means as the market index drops the VIX value increases and vice-versa. I will soon post another article, discussing the correlation between India VIX and Nifty and how VIX can be used as a hedging tool once India VIX futures and options are introduced.

Further Readings

India Vix Basics

India Volatility Index Calculations

Future of India Vix Futures

The India Volatility Index (India Vix) has lately hit the new all time low from the time of its start. On Aug 18th, 2010 India Vix has hit a new low of 16.40 which is even lower than the half of the year’s high of 34.37 on 25th may 2010. This may be a good news for retail investors as the volatility in the indian share market has subsided which indicated lower fear level among the investors and which may also trigger fresh foreign investments into india. Volatility index, popularly also known as the fear index, predicts the possibility of sharp movement in the stock market. The lower value of 16.40 indicates lower probability of some major swing in the stock market.

India Vix hit new low

India Vix hit new low in august 2010

India Vix was started by national stock exchange (NSE) in March 2009 and it has quoted the highest value of 56.07 on 19th may 2009 and the lowest value of 16.40 on Aug 18th 2010, thus, dropping almost 3 times in this period. NSE is also planning to launch derivatives (futures and options) on this index soon. More about it here.

Further Readings

India Vix Basics

India Volatility Index Calculations

How India Vix is related to Nifty Options

Future of India Vix Futures

India Vix Calculations

Before we understand how India Vix (India Volatility index) is calculated, let’s understand what is volatility and what is volatility index.

Volatility refers to the amount of uncertainty or risk about the size of changes in a security or index value. A higher volatility means that a security’s value can potentially vary over a larger range of values. This means that the price of the security can change dramatically. A lower volatility means that a security’s value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.

The Volatility Index, sometimes referred as the fear index, indicates the volatility in the market at present or in the near future. India VIX indicates the market’s perception of the expected near term volatility. All securities portfolios as well as stock market indices are subjected to volatility and thus the studying them can be helpful because options prices are chiefly governed by the volatility in the market.

Calculations for India VIX: India VIX is a volatility index based on the index option prices of NSE’s benchmark index NIFTY. India VIX uses the computation methodology of CBOE, with suitable amendments to adapt to the NIFTY options order book. India VIX is computed using the best bid and ask quotes of the out-of-the-money near and mid-month NIFTY option contracts, which are traded on the F&O segment of NSE. There are several factors which are used to calculate the index. Some important ones are these –

1) Time to Expiry: Time to expiry of the options contracts of Nifty that are selected to calculate the index. The time to expiry is computed in minutes instead of days in order to arrive at a level of precision expected by professional traders.

2) Interest Rate: The NSE Mibor rate of relevant tenure (i.e 30 days or 90 days) is being considered as risk-free interest rate for the respective expiry months of the NIFTY option contracts.

3) The Forward Index Level: A methodology called the forward index level is being used to select the contracts which will be used to calculate the index. India VIX is computed using out-of-the-money option contracts. Out-of-the-money option contracts are identified using forward index level. The forward index level helps in determining the at-the-money (ATM) strike which in turn helps in selecting the option contracts which shall be used for computing India VIX. The forward index level is taken as the latest available price of NIFTY future contract for the respective expiry month.

4) Bid-Ask Quotes: The strike price of NIFTY option contract available just below the forward index level is taken as the ATM strike. NIFTY option Call contracts with strike price above the ATM strike and NIFTY option Put contracts with strike price below the ATM strike are identified as out-of-the-money options and best bid and ask quotes of such option contracts are used for computation of India VIX. In respect of strikes for which appropriate quotes are not available, values are arrived through interpolation using a statistical method namely “Natural Cubic Spline”. After identification of the quotes, the variance (volatility squared) is computed separately for near and mid month expiry.

5) Weightage: The variance is computed by providing weightages to each of the NIFTY option contracts identified for the computation, as per the CBOE method. The weightage of a single options contract is directly proportional to the average of best bid-ask spread of that option contract and inversely proportional to the option contract’s strike price.

Finally, the variance for the near and mid month expiry computed separately are interpolated to get a single variance value with a constant maturity of 30 days to expiration. The square root of the computed variance value is multiplied by 100 to arrive at the India VIX value. In a nutshell, from usage point of view, higher the vix index value, higher the volatility.

Further Readings

India Vix Basics

How India Vix is related to Nifty Options

Future of India Vix Futures

The National Stock Exchange (NSE) will soon start derivatives (Futures and Options) on India VIX – India’s Volatility Index which is a measure on investor’s fear at a given point of time. NSE was disseminating the product since last one year which was calculated the end of the day but now NSE has started to disseminate the real time quotes as well which can be checked here. Securities and Exchange Board of India (SEBI), India’s market regulator, has given permission to the stock exchanges for starting derivatives based on volatility index. See this. NSE will be submitting the application to SEBI to start the F&O contracts based on India Vix soon. See the press release by NSE.

The volatility index called the India VIX, indicates the investor’s perception of the market’s volatility in the near term. The index depicts the expected market volatility over the next 30 calendar days. i.e. higher the India VIX values, higher the expected volatility and vice-versa. I believe that derivatives on Volatility Index (India Vix) would be a good tool to hedge the risk as investors can monitor the fear factor in the market.

As per Mr Ravi Narain, MD & CEO, NSE – “In the last few years, markets around the world have seen higher volatility. India is no exception and it has also witnessed higher volatility. Once India VIX is available for trading after regulatory approvals, it will give a lot of security to investors and traders, who face uncertainty, because the new product will empower them with better information and foresight. More importantly, it will give them the ability, to use the product to hedge their portfolios against the risk arising out of volatility.”

Thus, introduction to derivatives on India Vix is just around the corner. Be ready for it. :)

Further Readings

India Vix Basics

India Volatility Index Calculations

How India Vix is related to Nifty Options

Future of India Vix Futures