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This VIX can give you a headache
The National Stock Exchange has an index called India Volatility Index or VIX. Earlier this week, the index was at the highest level since 5 December 2012. Typically, equity market indices move in the direction opposite to this volatility index. Hence, there is an element of nervousness on the street.
India VIX is an index which measures the market’s expectation of volatility over the near term based on NIFTY Index option prices. Volatility Index is a measure, of the amount by which an underlying Index is expected to fluctuate, in the near term based on the order book of the underlying index options.
Index options are derivative instruments that allow an investor an option to buy or sell an underlying index for a pre-determined price at a pre-determined date above or below a certain level. Here are few things to note about this indicator:
What is India VIX: India VIX is a volatility index based on the NIFTY Index Option prices. “From the best bid-ask prices of NIFTY Options contracts, a volatility figure (in %) is calculated. This indicates the expected market volatility over the next 30 calendar days,” according to the NSE website.
Nifty options: CNX Nifty options are the most actively traded contracts in the derivatives segment of NSE. Nifty options account for two-thirds of the total traded derivatives contracts on the NSE. Investors are able to bet on the future prospects of the Nifty index using these options. The significant trading volume in Nifty contracts enables determination of the value of India VIX.
Fear gauge: In US, the Chicago Board Options Exchange or CBOE owns ‘VIX’ index derived from the options value of S&P 500 index. It is popularly called the ‘fear gauge’ as it captures the increase of risk in the market with its movement.
VIX movement: Over the past one month, the India VIX index has gone up from 13.70 to 15.09 (sharp rise of over 100%). During the same period, the CNX Nifty Index dipped 2.12%. While there is no significant fall in the NSE Nifty, the sharp surge in the India VIX index indicates that the market expects the element risk going up in the short-term.
Risks ahead: The sharp rise in India VIX reflects perceived risks in the market. India is expected to grow at 5% in 2012-13, according to Central Statistical Organisation. This is much lower than expected 5.5% growth forecast made by most experts and independent organizations. The December 2012 manufacturing data corroborated this view as it indicated a fall in the manufacturing growth over November 2012.
CNX Nifty is the most sought after contract in the derivatives market. Of the total 31,56,893 contracts traded last Wednesday, 20,96,761 or nearly 66% were Nifty options contracts. This shows that traders prefer to bet on the future trend in Nifty index movement. The NSE CNX Nifty index is made up of 50 leading companies listed on the bourse.