INDIA VIX or Volatility Index or Fear Index or What exactly is the VIX contract and how is it calculated?
VIX is a measure of volatility in the market, which is why it is called the volatility index. In common parlance it is called the Fear Index since a higher level of VIX represents a high level of fear in the market and a low level of VIX indicates a high level of confidence in the markets.
6 Things that the Volatility Index (VIX) indicates to the markets..
While, the VIX is a simple depiction of the expected volatility or risk in the markets, the bigger question is how to apply it practically.
Here are 6 ways to do it:
1. For traders in equity, the VIX is a very good and sound measure of risk in the markets. It gives these intraday traders and short term trades an idea of whether the volatility is going up or going down in the market. They can calibrate their strategy accordingly. For example, when the volatility is likely to shoot up sharply, the intraday traders run the risk of stop losses getting triggered quickly. Hence they can either reduce their leverage or they can widen their stop losses accordingly.
2. VIX is also a very good indicator for long term investors. Normally, long term investors are not overly bothered about short term volatility. But institutional investors and proprietary desks have limitations in terms of risk and MTM losses. When the VIX gives an indication of rising volatility, they can increase their hedges in the form of puts to play the market both ways.
3. VIX is also a useful indicator of the trader in options. Normally, the decision to buy or sell an option is based on volatility. When the volatility is likely to rise, options are likely to become more valuable and buyers tend to gain more. When the VIX is coming down there will be more wasting of the time value and option sellers are likely to benefit more.
4. It is also useful to trade volatility. In case you are expecting the markets to become more volatility one strategy is to buy straddles or strangles. But these become too expensive when volatility is likely to rise. A better way would be to buy futures on the VIX index itself so that you benefit from volatility without worrying about the direction of the market movement.
5. VIX is a very good and reliable gauge of the index movement. If you plot the VIX and the Nifty movement for the last 9 years since the inception of VIX, you will see a clear negative correlation in the charts itself. Markets typically tend to peak out when the VIX is bottoming out and the markets tend to bottom out when the VIX is peaking out. This is a useful input for index trades.
6. VIX is an invaluable tool for portfolio managers and for mutual fund managers. They can look to increase their exposure to the high Beta portfolio when the VIX has peaked out and they can add on to low beta stocks when the VIX has bottomed out. India VIX is just about 9 years old but has already emerged as a veritable tool for gauging the risk and volatility in the market.
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VIX is a measure of volatility in the market, which is why it is called the volatility index. In common parlance it is called the Fear Index since a higher level of VIX represents a high level of fear in the market and a low level of VIX indicates a high level of confidence in the markets.
6 Things that the Volatility Index (VIX) indicates to the markets..
While, the VIX is a simple depiction of the expected volatility or risk in the markets, the bigger question is how to apply it practically.
Here are 6 ways to do it:
1. For traders in equity, the VIX is a very good and sound measure of risk in the markets. It gives these intraday traders and short term trades an idea of whether the volatility is going up or going down in the market. They can calibrate their strategy accordingly. For example, when the volatility is likely to shoot up sharply, the intraday traders run the risk of stop losses getting triggered quickly. Hence they can either reduce their leverage or they can widen their stop losses accordingly.
2. VIX is also a very good indicator for long term investors. Normally, long term investors are not overly bothered about short term volatility. But institutional investors and proprietary desks have limitations in terms of risk and MTM losses. When the VIX gives an indication of rising volatility, they can increase their hedges in the form of puts to play the market both ways.
3. VIX is also a useful indicator of the trader in options. Normally, the decision to buy or sell an option is based on volatility. When the volatility is likely to rise, options are likely to become more valuable and buyers tend to gain more. When the VIX is coming down there will be more wasting of the time value and option sellers are likely to benefit more.
4. It is also useful to trade volatility. In case you are expecting the markets to become more volatility one strategy is to buy straddles or strangles. But these become too expensive when volatility is likely to rise. A better way would be to buy futures on the VIX index itself so that you benefit from volatility without worrying about the direction of the market movement.
5. VIX is a very good and reliable gauge of the index movement. If you plot the VIX and the Nifty movement for the last 9 years since the inception of VIX, you will see a clear negative correlation in the charts itself. Markets typically tend to peak out when the VIX is bottoming out and the markets tend to bottom out when the VIX is peaking out. This is a useful input for index trades.
6. VIX is an invaluable tool for portfolio managers and for mutual fund managers. They can look to increase their exposure to the high Beta portfolio when the VIX has peaked out and they can add on to low beta stocks when the VIX has bottomed out. India VIX is just about 9 years old but has already emerged as a veritable tool for gauging the risk and volatility in the market.
Get best stock market tips which gets you more profit everyday here.
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