Volatility Index is a measure of market’s expectation of volatility over the near term.
Usually, during periods of market volatility, market moves steeply up or down and the volatility index tends to rise.
As volatility subsides, volatility index declines.
Volatility Index is different from a price index such as NIFTY.
The price index is computed using the price movement of the underlying stocks.
Volatility Index is computed using the order book of the underlying index options and is denoted as an annualized percentage.
History of Volatility Index
The Chicago Board of Options Exchange (CBOE) was the first to introduce the volatility index for the US markets in 1993 based on S&P 100 Index option prices.
In 2003, the methodology was revised and the new volatility index was based on S&P 500 Index options.
Since its inception it has become an indicator of how market practitioners think about volatility.
Investors use it to gauge the market volatility and base their investment decisions accordingly.
India VIX
India VIX Computation
India VIX & Nifty
India VIX Futures
The VIX & Market Movement
the VIX is a measure of 30-day implied volatility as indicated by the pricing of Nifty index options.
The VIX is expressed as an annualized volatility measure, but it may actually be used to determined shorter-term market-price movements.
The VIX is the 30-day implied volatility of the Nifty, but it is also expressed as an annual figure.
When the VIX is quoted at 20, this can be interpreted as Nifty options pricing in an annualized move, up or down, of 20 percent in the Nifty index over the next 30 days.
CALCULATING EXPECTED 30-DAY MARKET MOVEMENT
30 Day Movement = VIX / Square Root of 12
If the VIX is quoted at 20, the result would be the market expecting movement of about 5.77 percent over the next 30 days. 5.77% = 20/3.46
