Based on the Nifty Index Option pricing, the volatility index is a quantifiable measure of volatility. It is a key indication of market risk as well as investor mood. It's computed in percentages and forecasts how quickly prices will fluctuate over the following 30 days.
Volatility is used to evaluate market emotion, specifically the level of fear among market players. The best bid-ask prices of Nifty Options contracts are used to compute it.
VIX an Indian index?
In reality, VIX is a registered trademark of the Chicago Board Options Exchange (CBOE). This index is used by the NSE, which has the necessary permits to use it in Indian stock exchanges.
In truth, India VIX utilises the identical calculation process as CBOE, but with a few tweaks to account for the Nifty options.
When the market index (Nifty) spikes or falls, the forecast of how quickly stock values will move in the near future changes as well. The volatility index would naturally stay low if the market traded flat for multiple days in a row. In other words, when prices vary dramatically, the volatility index rises.
Purpose of VIX
Direct correlation between market volatility and the India VIX -
This means that if the VIX is extremely high, investors may fairly expect that the NIFTY will make some important announcements or developments. The greater the VIX, the more volatile the market is. Any change to the NIFTY 50 index, which is a standard for the whole economy, might have a significant impact.
Investors should keep an eye on current VIX patterns since they can provide insight into what's to come. No noteworthy developments are foreseen while the index is low.
India VIX and NIFTY have a negative connection —
NIFTY's benchmark index will fall if the India Volatility Index rises. If VIX is high, this benchmark will be much higher. The NIFTY index was in the dumps during the 2008-2009 Subprime lending crisis and Lehman Brothers' (an investing and financial services powerhouse founded in 1847) subsequent collapse.
Globally, the Volatility Index's meaning has been affected by events that affect the global economy in a significant way. After each of these incidents, the formula for calculating this index has been tweaked somewhat.
Assists investors in assessing market mood –
One of the most critical functions of a Volatility Index is to assist any investor, retail or institutional, in determining the market's attitude. A close watch on the VIX provides insight into whether one should purchase or sell particular equities at present pricing.
A case in point is the pandemic in 2020. Markets tanked when the nationwide lockdown was announced in March. Indian equities lost about 40% of their net value, a significant economic shock that will take several years to recover from. Most indicators saw this as a signal to 'dump' their stocks at whatever price bands they were getting; there was worry that most equities would lose all value within a few months.
As a result, the volatility index (VIX) serves as a useful gauge of market risk and investor emotion. It predicts how quickly prices will rise or fall over the next 30 days.