VIX - What is It and How to use It ?

source : Nse India

VIX - Volatility Index , is a measure of market’s expectation of volatility over the near term

Volatility Index is a measure, of the amount by which an underlying Index is expected to fluctuate, in the near term, (calculated as annualised volatility, denoted in percentage) based on the order book of the underlying index options.

Volatility Index is a good indicator of the investors’ perception on how volatile markets are expected to be in the near term. Usually, during periods of market volatility, market moves steeply up or down and the volatility index tends to rise.

India VIX is a volatility index based on the Nifty 50 Index Option prices.From the best bid-ask prices of Nifty 50 Options contracts, a volatility figure (%) is calculated which indicates the expected market volatility over the next 30 calendar days.

There are some differences between a price index, such as the Nifty 50 and India VIX. Nifty 50 is calculated based on the price movement of the underlying 50 stocks which comprises the index.India VIX is calculated based on the bid-offer prices of the near and mid month
Nifty 50 Index Options

How to use VIX

1.Investors could hedge their portfolios against volatility with an off-setting position in India VIX futures or options contracts

2.Investors could also use the implied volatility information given by the index, in identifying mis-priced options.

3.Short sale positions could expose investors to directional risk. Derivatives on volatility index could help investors in safeguarding their positions and thus avoid systemic risk for the market.

4.Based on the experience gained with the benchmark broad based index, sector specific volatility indices could be constructed to enable hedging by investors in those specific sectors.