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India Vix - Definition & Advantages of India Vix | What is India Vix?

India Vix is the measure of expected volatility in the Indian Stock Market. In finance, volatility is equated to risk and is defined as the ‘rate and amplitude of price change’. 

The volatility index calculates how much an index will fluctuate in the near term depending on the underlying index options' order book. It is measured in percentage, e.g., 20%.

India VIX measures the expected volatility of the Indian stock market over the next 30 days using the best bid-ask prices for NIFTY Options contracts, i.e. by taking the weighted average of the implied volatility of Nifty 50 index options. The implied volatility is calculated using the Black-Scholes model. India VIX is expressed in percentage terms and represents the annualised expected volatility. India Vix is also known as the ‘fear index’ because it indicates the level of uncertainty or fear in the market.

Advantages of India VIX: The volatility index tells the markets six things.

1. Risk Management: The VIX is a reliable indicator of market risk for equity traders.

This information helps intraday and short-term stock traders determine whether market volatility increases or decreases. They can adjust their approach appropriately.

2. Provides insight into market sentiment

India VIX is a good indicator of market sentiment. A high India VIX indicates that investors are fearful and uncertain about the market's future. On the other hand, a low India VIX indicates that investors are confident about the market's future.

3. For long-term investors, VIX is also a beneficial signal. Long-term investors often don't worry too much about short-term volatility. However, there are restrictions on risk and MTM (mark-to-market) losses for institutional investors and proprietary desks. They can increase their put hedges to play both sides of the market when the VIX indicates growing volatility.

4. For options traders, VIX is another helpful indicator. Volatility typically determines whether to buy or sell an option. Options are expected to increase in value, and buyers often profit more when volatility is predicted to grow. Conversely, option sellers will benefit more if the VIX declines since more time will be wasted.

5. Helps in trading decisions

Trading volatility can be beneficial. If you anticipate more market volatility, purchasing straddles or strangles is one technique. These are options trading tactics. But when volatility is expected to increase, these become unaffordable.

6. Helps in predicting market trends

VIX is a very accurate and trustworthy indicator of index movement. The VIX typically peaks out when the markets are at their highest and bottoms out when the VIX is at its lowest point. This is valuable input for trading indexes.

7. The VIX is crucial for mutual fund managers and portfolio managers.

When the VIX has reached its top, it can try to expand its exposure to high beta portfolios, and when the VIX has reached its bottom, it can add to its holdings of low beta companies. Even though India VIX is just a little over nine years old, it has already established itself as a reliable tool for assessing market risk and volatility.

Why today's NIFTY VIX is significant?

The VIX can be utilised efficiently by investors to make estimates about companies and construct their trading strategies accordingly, as they know that price volatility significantly influences trading performance.

The movement of the India VIX and the causes of volatility are synchronised. Therefore, if the price of the India VIX index increases, traders should prepare for large levels of volatility. This causes a substantial change in the NIFTY index. On the other hand, if the value is low, there will be little change in the NIFTY index itself because less volatility will be expected.

India VIX is a valuable tool for investors, traders and anyone tracking the stock market. It provides insight into the expected volatility of the Indian stock market and helps manage risks, make trading decisions, predict market trends and understand market sentiment. Investors can make informed decisions and maximise their returns by keeping an eye on the India VIX