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How India VIX Is Calculated and What to Expect After Seeing High or Low India VIX


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For option traders, India VIX is a very important factor that helps to make a decision. It’s a Volatility Index based on the index option prices of NIFTY F&O segment only not any other index like BSE or MCX.

India VIX is a volatility index based on the index option prices of NIFTY. India VIX is computed using the best bid and ask quotes (the difference between quotation of sellers and buyers of options at different strikes) of the out-of-the-money of near and mid-month NIFTY option contracts which are traded on the F&O segment of NSE. India VIX indicates the investor’s perception of the market’s volatility in the near term. The index depicts the expected market volatility over the next 30 calendar days. i.e. higher the India VIX values, higher the expected volatility and vice-versa.

What does India VIX indicate?

India VIX indicates the investor’s perception of the market’s future volatility (not more than a month). The index depicts (or assumes not guarantees) the expected market volatility over the next 30 calendar days. If the computation generates higher India VIX it is assumed that the volatility in NSE F&O segment is going to be high and if the computation generates lower India VIX it is assumed that the volatility in near future is going to be low.

Which option strikes are most affected by increasing or decreasing VIX?

When a low/high VIX is generated the most effected option strikes are At-The-Money (ATM) options. Please note that ATM and OTM options are made of Theta (time) value and VIX factor only. Rest of then factors do not affect much. You can read more on Option Greeks here. The most affected options are At The Money (ATM) and Out Of the Money (OTM) calls and puts that are more than 23 days from expiration and less than 37 days from expiration for Nifty. Please note that these are most traded highly liquid options.

Since now nifty weekly options are traded, each week, the contracts and the calculations roll to the next maturity week. As one week expires, then the pricing of the options expiring next week is effected.

Reference Read: https://www.nseindia.com/content/vix/India_VIX_comp_meth.pdf

Chicago Board Options Exchange has written an in-depth white paper on how VIX is calculated – please note that NSE calculates India VIX on the same lines so if you want to read you can get it here:

https://www.cboe.com/micro/vix/vixwhite.pdf

And if you are in a hurry here is the formula of how VIX is calculated (warning – very complicated):

https://www.investopedia.com/articles/active-trading/070213/tracking-volatility-how-vix-calculated.asp

Why deep Out-Of-Money (OTM) and In-The-Money (ITM) options are not much affected by increasing or decreasing India VIX?

Because after 5% distance from near the money options there is not much left in them to increase or decrease. If their value is increased too much option sellers will be at a benefit. This is not good for option buyers so there are not many significant changes done to deep out of the money options calls or puts when India VIX increases or decreases.

How can a trader take a decision based on high or low India VIX?

Since high India VIX indicates volatility in the markets a Future Traders can keep their stop loss levels less than normal days. Or if they are not comfortable to bring the stop loss levels near then they should increase the levels where they book profits. You will not find this in any book please note this down in your trading diary.

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About the author: I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

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