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India VIX, often called the ‘Fear Gauge’, measures the anticipated 30-day volatility of the Nifty 50 Index. It helps investors and institutions assess how much the market expects prices to swing, providing important context during uncertain or stable periods.
To start, let’s examine the purpose and origins of India VIX:
The India VIX quantifies market sentiment by estimating the volatility investors expect over the next month. A rising VIX suggests anxiety or fear, while a falling VIX indicates calm or confidence among traders.
Developed by the Chicago Board Options Exchange (CBOE) to support the S&P 500, the VIX model was adapted for the Indian market by NSE. It is based on trading in Nifty options and aims to represent future uncertainty in percentage terms.
Next, let’s review the mechanics behind computing this volatility measure:
Calculation involves Nifty option prices, specifically the near and next‑month contracts. It uses:
Mid-point of bid and ask prices for each strike
A weighting mechanism based on strike spacing
Time to option expiry
These inputs combine to derive a variance estimate that reflects expected price fluctuations.
Here is a simplified version of how India VIX is calculated:
India VIX (%) = sqrt( Σ ( Ki × Oi ) ÷ T ) × ( 1 ÷ sqrt(365) ) × 100
Where:
Ki = strike price
Oi = option premium (mid-point)
T = time remaining until expiry (in years)
This formula delivers a percentage volatility estimate representing annualised expectations, scaled down to the 30-day equivalent.
To grasp what the index value means for investors, consider this:
High VIX (above ~25): Suggests heightened market fear or uncertainty, possibly due to news or events.
Low VIX (below ~15): Indicates stability or complacency among investors.
These ranges are indicative; actual levels vary depending on economic or global conditions.
Traders and analysts track VIX trends to anticipate potential market stress. Though it doesn’t predict price direction, a sudden VIX spike often follows expected market shifts or policy announcements.
To see how India VIX compares globally, here’s a comparison table that highlights key characteristics:
Feature |
India VIX |
CBOE VIX (US) |
|---|---|---|
Based on |
Nifty options |
S&P 500 options |
Exchange |
NSE |
CBOE |
Time Horizon |
30-day expectation |
30-day expectation |
Volatility Measure |
Implied volatility |
Implied volatility |
This table illustrates that while both indices aim to reflect 30-day volatility, they apply to different markets and underlying indices.
Here’s a brief scenario that shows how the VIX might react:
A sudden geopolitical event emerges.
Investors expect larger Nifty swings.
Nifty option prices rise, increasing implied volatility.
As a result, the India VIX value moves upward, perhaps from 15 to 28, signalling heightened market anxiety.
Such spikes typically occur before or during significant market-moving events.
India VIX provides a useful measure of expected market volatility over the next month, based on Nifty option prices. It does not signal the direction of market movements, but it offers valuable insight into investor sentiment and risk perceptions.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
The India VIX Index measures the market’s expectation of volatility in the Nifty 50 over the next 30 days.
It’s calculated using option premium data from Nifty near and next‑month contracts, strike price weights, time to expiry, and annualisation of variance.
A high VIX indicates elevated fear or uncertainty; a low VIX suggests market calm or confidence.
They both indicate implied volatility for a 30-day horizon, but India VIX is based on Nifty options, while CBOE VIX relies on S&P 500 options.
Not directly. It measures expected volatility, not market direction, though a sharp rise often occurs around stress events.
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Posted on 18 Aug
Geetanjali Lachke
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