Introduction
It is very important to understand volatility in the market to make the best decisions while investing and trading. To analyze the expected volatility of the Nifty 50 Index, the best tool you can use is the India VIX or Volatility Index.
India VIX has been a part of market analysis for more than 10 years now. It tells about the fluctuations and volatility in the market which is vital information. In this article, we will explore more about the India VIX, its calculation, and other related information.
What is the India VIX?
India Volatility Index or India VIX is calculated by NSE and it measures the market’s fluctuations and volatilities expected in the future. It reflects on the India VIX share price and its effects on investors. It was introduced in 2003 in India, but the original idea originated in 1993 by the Chicago Board Options Exchange.
The VIX rises when the market fluctuates frequently. When the VIX is high, investors can expect high fluctuations in share prices. Similarly, when the VIX is low, it indicates a stable market where the prices are not very volatile. So, the index shows how an investor can perceive the market in the coming days or months.
India Volatility Index shows the market volatility expected and investors’ sentiments in the stock market. One can understand the risk and uncertainty involved in the market during a certain period using VIX.
What is VIX India Formula?
Volatility is one of the primary characteristics of the stock markets. In India, the National Stock Exchange (NSE) calculates the volatility of any share using the VIX. This involves considering some essential elements while calculating India VIX companies share prices:
The following formula is used to calculate the India VIX:
India VIX = 100 * √[(Sum of Weighted Implied Volatility Squared) / Total Weight]
The formula features the sum of squared implied volatilities multiplied by their weight. The total weight is the sum of interest of every option taken for the calculation.
What to Consider for Calculating VIX India?
The following factors are considered to calculate VIX.
- Expiry Time – It is measured to reflect market volatility in a precise manner.
- Rate of Interest – The risk-free rate of interest is considered for a 30 to 90-day time period while calculating.
- Forward-Index Level – To calculate VIX India, you have to use the out-of-money option. The forward-index level of the recent Nifty future contract is pivotal in the calculation.
- Bid-Ask Price – The best ask and bid prices of option contracts are also used to calculate the VIX India. As a reference point, you can consider the ATM strike for it.
Conclusion
India VIX Index is a measurement of expected market volatility. It helps investors in better decision-making based on market fluctuations. They can take the most suitable position that needs to be taken based on VIX.