What is India VIX is a common question among new investors and traders who want to understand market risk better. India VIX, short for India Volatility Index, is a metric calculated by the National Stock Exchange (NSE).
It is used to measure the market’s anticipation of volatility of Nifty 50 over the next 30 calendar days and is based on the NIFTY Index Option prices. It is also often called the “fear gauge” because it rises when investors are nervous and falls when markets are stable. While India VIX does not predict market direction, it helps traders and investors better understand overall market risk and sentiment.
India VIX was launched by the NSE in 2008, using the methodology licensed from the Chicago Board Options Exchange (CBOE).
The goal behind launching it was to give Indian traders and investors a standardised measure to gauge expected market volatility, mirroring established global standards. In the years since, India VIX has grown into one of the country’s most closely watched volatility indicators.
India VIX uses the computation methodology of CBOE, with suitable amendments to adapt to the NIFTY options order book using cubic splines, etc
The factors considered in the computation of India VIX are mentioned below:
1) Time to expiry: 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 relevant tenure NSE MIBOR rate (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: 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. 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 option contract is directly proportional to the average of best bid-ask quotes of the option contract and inversely proportional to the option contract’s strike price
Computation of India VIX : 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.
Let us break this down in a very simple way.
India VIX and NIFTY usually have an inverse relationship.
While there is no fixed rule, traders often use general ranges.
These levels help traders understand market sentiment at a glance.
India VIX is one of the easiest ways to get a quick read on the market’s expected volatility. In simple terms, how much prices are likely to swing in the near term. It doesn’t tell you whether the market will go up or down, only how volatile or calm traders expect things to be. A high India VIX means high expected volatility, with more fear and bigger price swings on the way, while a low India VIX means low volatility and a calmer, more stable market. Since India VIX usually moves in the opposite direction to the NIFTY, it’s a handy gauge of market risk and sentiment.
To know more, explore the Tradomate expert blog section!
DISCLAIMER: This article is for educational and informational purposes only. It does not constitute investment advice or a research report.
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