Market Volatility Unveiled: India VIX and Its Influence

After a period of consolidation during the first half of the week, the NIFTY50 faced significant downward pressure on the expiry day of the September derivatives series. The index closed Thursday’s session with a loss of 192.90 points (-0.92%). Consequently, Nifty has breached a crucial support level, the 50-day moving average (50-DMA), which currently stands at 19629 on a closing basis. Any potential technical rebounds are expected to encounter resistance at this level.

When the week began, the volatility index, INDIA VIX had once again dropped to one of its precariously low levels seen in recent quarters and that was a major concern when we stepped into the new week. This volatility gauge spiked nearly 12% intraday in Thursday’s session. Although there is still one day to go in this week, as of Thursday’s close, INDIAVIX has surged 20.29% on a weekly note.

What is INDIAVIX and how can it impact the market and Options Traders:

INDIAVIX, often referred to as the “India VIX,” is a volatility index that measures the market’s expectation of future volatility in the Indian stock market. It is similar to the CBOE Volatility Index (VIX) in the United States, which is often called the “fear gauge” as it reflects investor sentiment and expectations of market volatility.

INDIA VIX is calculated based on the order book of NIFTY options. It represents the market’s expectation of volatility over the next 30 days. The calculation involves averaging the weighted prices of near and next-month NIFTY options. Higher option prices indicate higher expected volatility, leading to an increased VIX value.

Here’s how INDIAVIX can impact the markets and options traders:

1. Market Sentiment Indicator: INDIAVIX is seen as a barometer of market sentiment. When INDIAVIX is low, it suggests that investors expect relatively stable and less volatile market conditions. Conversely, when INDIAVIX is high, it indicates that investors anticipate greater market turbulence and uncertainty.

2. Market Volatility Prediction: INDIAVIX provides traders and investors with an estimate of expected future market volatility. High INDIAVIX values may signal that traders should exercise caution and consider risk-management strategies, such as using options or adjusting their portfolios.

3. Options Pricing: Options prices are influenced by implied volatility. As INDIAVIX rises, options premiums tend to increase, making options more expensive. Options traders use INDIAVIX to assess whether options are relatively cheap or expensive compared to historical levels. High INDIAVIX can make options trading more attractive for those seeking to hedge or speculate on market movements.

4. Risk Management: Traders and investors use INDIAVIX to gauge risk and adjust their trading strategies accordingly. For example, in periods of elevated INDIAVIX, traders may opt for strategies that involve purchasing protective puts or selling covered calls to hedge against potential losses.

5. Contrarian Indicator: Some traders follow a contrarian approach, which means they do the opposite of what market sentiment suggests. For instance, when INDIAVIX is exceptionally high, contrarian traders might see it as an opportunity to buy when others are fearful and sell when others are overly optimistic.

6. Trend Reversal Indicator: Extreme movements in INDIAVIX can sometimes signal potential trend reversals in the broader market. A sharp increase in INDIAVIX after a period of low volatility may indicate that a market correction or significant move is on the horizon.

All in all, INDIAVIX is a valuable tool for market participants, especially options traders, as it provides insights into market sentiment and expected volatility. By monitoring INDIAVIX and understanding its implications, traders can make more informed decisions about their trading strategies and risk management.

Milan Vaishnav, CMT, MSTA
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