Students, Today I will take a Surprise Test!
I know many would have got a Deja Vu! feel or rather went into nostalgia after reading that sentence. Right?
We all feared the surprise test factor in our school days. I mean what’s wrong with our teacher, can’t they even tell us in advance about the test?
Sorry, We can’t do that for you.
Let’s come back to the present moment. Now, What if I tell you that you can predict or estimate the volatility in the Indian stock market. Yes, there is something called India VIX ‘Volatility Index’.
What exactly is India VIX?
It reflects the amount of volatility that traders expect in the next 30 days in the NSE index. It is nothing but a calculation of price movements that investors expect in the market over crucial market events or news. When the value of the VIX index is low, it implies no fear factor in the market, meaning investors are more confident to invest in the market. Conversely, a higher value in the VIX index indicates rising uncertainties and fear in the market.
The Chicago Board Options Exchange (CBOE) invented the VIX in 1993, hence it is also known as the CBOE VIX. It is based on S&P 500 Index options contracts expiring in the following 30 days. The NSE was inspired by this and created its own India VIX.
What all factors are considered while deriving VIX?
It considers five variables for calculation – strike price, the market price of the stock, expiry date, risk-free returns, and volatility. VIX measures volatility expected by investors by taking into account the best bid and ask quotes of the out of the money, present, and near-month NIFTY options contracts.
For example, VIX value is 20. It means investors expect prices to change or fluctuate in the range of +20 and -20 in the next or coming thirty days. Theoretically, VIX oscillates between 15 and 35. Any value below 15 represents low volatility against values higher than 35, which indicate high fluctuations in the market.
Volatility and India VIX have a positive correlation, which means when the value of India VIX is high, volatility is also high in the market. For example, in the pre-COVID situation, India VIX was significantly low at below 30 since 2014, indicating stability.
It seems Indian VIX can give some picture about the future volatility in the Indian stock market.
So, what’s stopping you from making your first trade?
GO ahead and happy investing!