»Fast Profits Daily by Equitymaster

On This Day - 29 MAY 2020
What You Should Know About the India Vix

Apurva Sheth, Editor,Profit Hunter Pro

I'm sure you have at least heard the term India Vix or Vix for short. You may have heard that it something to do with volatility.

But what is it exactly?

More importantly, how can you as a trader use it to make profits?

Let's find out...

Hi, I am Apurva Sheth and a welcome you to this latest edition of Fast Profits Daily. Today I am going to talk about India volatility index or popularly known as India Vix.

A lot of times we hear that India Vix is trading near its all time lows and there is lot of complacency in the markets and most recently we heard in the month of March that India Vix is near its all time highs and there is lot a fear in the markets.

So what does all this mean and how can one make a practical use of this data, which comes from India Vix?

So basically, India Vix is calculated by using the options prices of Nifty near month options contracts. So lower reading in the India Vix basically indicates that market's expectations of near term voluntary is very low.

And if the India Vix number is a high, then it indicates that the market's expectation of volatility is also very high. Now the range for India Vix on the lower side is 10. Ten is the bottom and the lower side range is 10 to 15 whereas on the higher side 80 to 90 would be considered as a very high.

Now most of that's at the extreme ends but most of the times, Nifty India Vix trades in these ranges. So how can you interpret this data?

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Or take a simple example. How an India Vix reading of let's say 30 would differ from an India Vix reading of 40 or 50?

So today will be see just that. So there's a simple method to analyse this Vix data and to do that, you can do it in a simple calculator.

Now there are 250 trading sessions in a year. So now you need to take the square root of 250. So here in the calculator I take the square root of 250. Now the number that comes is 15.81. Now, just remember this number.

Now you must divide the India Vix by this number. So let's say the India Vix reading is at 30. So 30 divided by 15.81. So 1.89.

So 1.89 percentage is the trader's or markets expectation of Nifty's daily volatility or daily movement. So Nifty can swing either way, up or down, by 1.89%.

Now let's say the volatility number is 50. So 50 divided by 15.81. So the number is 3.16. So 3.16 is the market's expectations of the Nifty's daily range.

So you can see that how we can interpret this data now. So 3.16 either ways in Nifty. Now Nifty is an index and 3% movement is something rare. So as and when the volatility moves up, the market's expectation of Nifty's daily range also moves up.

So let's say the volatility, which we had recently seen in the month of March was around 80. So 18 divided by 15.81. It was 5%. So 5% is quite huge for index like Nifty. In normal circumstances, you won't see such movement in stocks as well but Nifty, which is an index, which is a group of stocks, and if the index could swing either ways 5%, that's huge.

So how actual traders use such kind of data? So options writers use India Vix data along with most of the other things, to sell their options calls any puts. So someone who would want to eat the premium would know that 5% is the daily range for the Nifty.

So an options writer would sell contracts with strike price, which are of away by 5% from the current market price.

So that's how traders use the India Vix data to identify what's the daily range of the markets and how they use this when they are making their assessments of selling the calls or puts.

So that's all from me for today. I hope you enjoyed watching this video and in case you did, then please don't forget to like it, share it with your friends and family and help them become better traders.

Now we at Equitymaster also have a Telegram channel where I post regular updates on the markets. So you must join the telegram channel as well. Our Telegram handle is Equitymaster Official. So don't forget to join our telegram handle.

So that's all from me for today. Thanks a lot. Have a nice day. Stay safe and stay protected. Thank you.

Warm regards,


Apurva Sheth
Senior Research Analyst, Fast Profits Report
Equitymaster Agora Research Private Limited (Research Analyst)

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