Research Digest | April 24, 2019
IndiaVIX is widely known as India’s Volatility Index. It is an indicator of the market mood in the short term.
Volatility Index (VIX) is the popular measure of the stock market’s expectation of volatility implied by
Options in the derivatives segment of NSE. It is also known as fear index. The value of the IndiaVIX
denotes the degree of market fluctuations that active traders expect in the Nifty 50 in the coming one
month i.e. 30 days. Its concept is originally derived from Chicago Board Options Exchange (CBOE) in
1993. NSE in coordination with CBOE launched in India in April 2008. The VIX value is the percentage by
which investors expect the annualized markets movement in the next 30 days. So, if the VIX is at 20,
investors are expecting the markets to change by 20%. IndiaVIX values are calculated using the options
values in NSE derivatives segment.
IndiaVIX is also considered as forward looking index or leading indicator. The value of indices like Nifty or
Sensex reflects the value of the stocks under the same basis on the market capitalization and free float in
the stocks. However, IndiaVIX reflects market sentiment that is likely to prevail over the next 30 days.
IndiaVIX & Index: Inverse Relationship
Historical data from 2009 tells us that the high points for the VIX were reached at 55-57 levels in AprilMay 2009. It crossed 30 levels in the 2014 (year of general elections). It was observed the IndiaVIX has
increased during the time of general elections in 2014. However a different class of market participants
also known as Contrarians watch this index as an opportunity. Ideally smart investors grab a fall in the
market as an opportunity to accumulate good quality stocks. Hence higher value of IndiaVIX will attract
prepare value investors to add good stocks in their portfolio.
In last week of October 2008, Nifty fell by almost 500 points and IndiaVIX went up from 45% to 70%. So,
the VIX goes up as the market becomes fearful and falls when the market feels confident about its future
direction. This is because option prices tend to rise when investors expect the markets to be volatile and
this pushes up the VIX. On the other hand, if investors don’t expect the markets to move very sharply, the
prices of index options decline, bringing down the VIX.
In last few sessions the negative correlation between Nifty and IndiaVIX has actually gone away. In other
words, the correlation between the two has turned positive. On 29th March 2019, IndiaVIX was quoting
17.1850 and from there it moved up to 21.0200 on closing basis on 15th April 2019. In the same period
Nifty 50 moved from 11570 to 11690 (including making new life high of 11761). This implies that negative
correlation between the two has broken for the time being. Even though the value of Nifty made to all time
high of 11761 and reverse by 100 points or so during the said period, the value of IndiaVIX is still rising.
One may consider other parameters to identify the market trends but currently IndiaVIX is showing an
opportunity also. As this may give good upside rally, if the election results are in favour of what most of
the market participants are expecting.
The past data suggest that most of the time IndiaVIX has failed to breach and sustain above 22 levels.
Even at time of May 2014 (which was general election), IndiaVIX reached to 38 levels but failed to sustain
above same and has seen drastic fall near 18 immediately within two weeks post the election results
We assume that India VIX shall follow the similar trend in coming days. Hence smart traders may long
India VIX in near-term and initiating long volatility based strategy. Further, traders can take opportunity to
book profits around results of general elections.
Once IndiaVIX settles near 15 to 18 levels, it can provide good opportunity to re-enter in the market.