You must have seen us talking about India VIX on The Stock Market Show and on the pre & post-market reports. But, are you really aware India VIX is? Does it tell you something about the market? How should retail investors read this parameter? Find all about this here!
VIX stands for Volatility Index. This tells that India VIX is nothing but India Volatility Index. It tells about the volatility which can be expected by the investors in the Indian market. In simpler terms, volatility is referred to as the “rate and magnitude of changes in prices” expected in either direction. Originally, VIX is a trademark of the Chicago Board Options Exchange. NSE (National Stock Exchange of India) has been granted a license to use this mark with the name of India VIX.
The calculation of this volatility index is done with the help of the NIFTY Index Option prices. It is the representation of the annualized change that can be expected in the Nifty 50 for a duration of the next 30 days. Do focus on the word annualized change. Let’s take an example to make it clearer.
Suppose India VIX is 20.97%. That means for the next 30 days, Nifty 50 is expected to move in either direction by the investors by an annualized rate of 20.97%. The value of VIX cannot go below 0 and cannot exceed 100.
How does it affect you?
It has been seen previously that VIX and Nifty move in opposite directions. We saw the biggest example of this during Covid-19 last March. On 24th March 2020, India VIX touched the mark of 83.63! This is when the market was unpredictable due to the Covid-19 lockdowns around the world. But, do not judge the direction of the market with the movement in VIX. The India VIX will only tell how big a move can happen in the market irrespective of the direction.
The higher the VIX, the higher the risk is for retail investors. Equities may not be a very safe asset class when VIX is unusually high. India VIX is said to be normal if it around the 20-mark, which it is currently at as of April 2021.
You cannot buy/sell India VIX, it is not a tradeable index.