Nifty Volatility Index (VIX)
Indian Financial Markets have come a long way and a recent example of the same is the launch of the Nifty Volatility Index (VIX), which is a standard feature of mature markets worldwide.
Unless you go into the mathematics of it, volatility as a concept can be easily understood - it simply refers to the amount of uncertainty or risk about the size of changes in an asset’s value. High volatility would mean that the changes in values could be spread out over a larger range, whereas low volatility would imply the opposite. The VIX measures the market’s expectation of Nifty/Sensex volatility over the coming 30 day period and is often termed as the ‘fear index’. It calculates a volatility figure from the best bid-ask price of Nifty 50 Options contracts (traded on the Derivatives segment of NSE).
When the market is going in one direction (either ways) volatility is observed to be low and will thus be reflected in a low VIX value and when it shows no directional trend and is not range bound volatility will be higher (reflected in a higher VIX value).
It is not necessary that an investor look at VIX figures on a particularly regular basis, but one must look out for drastic changes or spikes, as they are often found to be associated with market falls.
An investor may also use this figure to asses if the near term market fluctuations match with his/her risk appetite, it can also help in timing sell decisions better.
Furthermore the NSE will be launching products based on the VIX, which would help investors hedge against volatilty amongst other things.
Tags: Daily Funda