What is the Volatility Index
(This blog is purely for myself and the information appearing may be incorrect. Do not risk using this as reference material)
Volatility index or VIX is also called the "fear index" or "risk index". It is an indicator that captures the level of fear in the capital markets and help investors understand market risks better and take decisions accordingly. The higher the VIX the more risky it would be for investors.
VIX was first "invented" by the Chicago Board Options Exchange (CBOE) in 1993. Nasdaq has its own called "VXN" which tracks the Nasdaq and Dow has one called "VXD" that tracks the Dow Jones Industrial Average.
The implied volatility, as captured by the volatility index, is not about the size of the price swings, but rather the implied risks associated with the stock markets. The implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets.
Higher values of VIX readings indicate a higher risk in the market place. The World Trade Center attack in 2001 the VIX climb above 45, as the investors' fear level reached the zenith.
India VIX is a volatility index based on the Nifty 50 Index Option prices. It uses the same methodology that CBOE uses to compute its VIX, which is based on the prices of options of the S&P CNX 500 index. (The S&P CNX 500 is India’s first broadbased benchmark of the Indian capital market. The S&P CNX 500 represents about 84.24% of total market capitalisation and about 78% of the total turnover on the NSE as on March 31,2008.)
From the best bid/ask prices of Nifty 50 options contracts (which are traded on the F&O segment of the NSE), a volatility figure percentage is calculated, which indicates the expected market volatility over the next 30 calendar days.
Differences between Nifty and India VIX
There are some differences between a price index, such as the Nifty 50 and India VIX.
Nifty 50 is calculated based on the price movement of the underlying 50 stocks, which comprises the index. India VIX is calculated based on the bid-offer prices of the near- and mid-month Nifty 50 Index Options.
While Nifty 50 signifies the direction of the market, India VIX indicates the expected near-term volatility and how the volatility is changing from time to time.
When the market is range bound or has a mild upside bias, volatility is globally observed to be typically low. On such days, investors prefer buying call options (a position taken on the view that the market will move higher) over put options buying (a position taken on the view that the market will move lower). This kind of market may indicate lower risk.
Conversely, when the selling activity increases significantly, anxiety among investors tends to rise. Investors rush to buy puts, which in turn pushes the price of these options higher. This increased price that investors are willing to pay for put options shows up in higher readings on volatility index.
Volatility index or VIX is also called the "fear index" or "risk index". It is an indicator that captures the level of fear in the capital markets and help investors understand market risks better and take decisions accordingly. The higher the VIX the more risky it would be for investors.
VIX was first "invented" by the Chicago Board Options Exchange (CBOE) in 1993. Nasdaq has its own called "VXN" which tracks the Nasdaq and Dow has one called "VXD" that tracks the Dow Jones Industrial Average.
The implied volatility, as captured by the volatility index, is not about the size of the price swings, but rather the implied risks associated with the stock markets. The implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets.
Higher values of VIX readings indicate a higher risk in the market place. The World Trade Center attack in 2001 the VIX climb above 45, as the investors' fear level reached the zenith.
India VIX is a volatility index based on the Nifty 50 Index Option prices. It uses the same methodology that CBOE uses to compute its VIX, which is based on the prices of options of the S&P CNX 500 index. (The S&P CNX 500 is India’s first broadbased benchmark of the Indian capital market. The S&P CNX 500 represents about 84.24% of total market capitalisation and about 78% of the total turnover on the NSE as on March 31,2008.)
From the best bid/ask prices of Nifty 50 options contracts (which are traded on the F&O segment of the NSE), a volatility figure percentage is calculated, which indicates the expected market volatility over the next 30 calendar days.
Differences between Nifty and India VIX
There are some differences between a price index, such as the Nifty 50 and India VIX.
Nifty 50 is calculated based on the price movement of the underlying 50 stocks, which comprises the index. India VIX is calculated based on the bid-offer prices of the near- and mid-month Nifty 50 Index Options.
While Nifty 50 signifies the direction of the market, India VIX indicates the expected near-term volatility and how the volatility is changing from time to time.
When the market is range bound or has a mild upside bias, volatility is globally observed to be typically low. On such days, investors prefer buying call options (a position taken on the view that the market will move higher) over put options buying (a position taken on the view that the market will move lower). This kind of market may indicate lower risk.
Conversely, when the selling activity increases significantly, anxiety among investors tends to rise. Investors rush to buy puts, which in turn pushes the price of these options higher. This increased price that investors are willing to pay for put options shows up in higher readings on volatility index.
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