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All you need to know about VIX futures
Volatility is the most basic quality of the stock markets. This is reflected in the fluctuation of stock prices. Traders often speculate about the short-term movement of stock prices, and accordingly buy or sell. Gauging volatility is a constant task for participants as it directly impacts their exposure and profitability. However, today, not only can you quantify the volatility, but also trade on the same. This can be done using the VIX futures which are being introduced on the NSE soon.
Here’s all you need to know:
VIX and VIX futures:
India VIX is an index to measure expected volatility using prices of Nifty Index Options – a derivative instrument. It thus helps quantify the sentiment on the market.
Futures are contracts obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. These contracts are traded in the F&O market. These contracts have a fixed lot size, meaning, one contract will have a fixed number of shares.
How to trade:
“VIX futures will be traded in the derivative segment of the National Stock Exchange (NSE). There will be three contracts available at any point in time. Every Tuesday, a contract will expire. These contracts will be priced by multiplying the India VIX value with 100. For example, if the value of India VIX is 23, the price of that contract will be quoted as 2300. NSE has not announced the lot size of the contracts.
VIX and Nifty:
Higher the VIX level, greater is the nervousness in the Street. This is often followed by a market slump. Similarly, a fall in the VIX is followed by a rise in the markets. Investors can thus use the VIX futures to bet on volatility. For example, if they expect the market to fall in the short term, they can short the Nifty and Long the VIX futures contract.
Rs 10 lakh
As mentioned earlier, Derivative contracts are traded in lots. For VIX Futures, the minimum contract value will be Rs 10 lakh.