The VIX Index
Now that we have understood the concept of volatility and its types, next in this chapter, we will learn how to track the volatility with the help of ‘VIX.’
VIX, or the Volatility Index, is used to measure the near term volatility expectations of the market. The Chicago Board Options Exchange (CBOE) introduced volatility as an asset class in the form of an index in the year 1993. It gained immense popularity after its launch. Hence (CBOE) introduced trading on the VIX derivative in the year 2004.
The volatility index and Market index are completely different. The market index measures the direction of the market, calculated by the price movements of the underlying stocks. However, the volatility index measures the volatility of the market and is calculated using the order book of the underlying index's options. Another difference is that the market index value is expressed in numbers, whereas the volatility index is expressed as an annualized percentage. The volatility index based on the order books of Nifty options is known as India VIX.
IMPORTANCE OF INDIA VIX:
India VIX was launched by the NSE in 2008, followed by NVIX Futures in 2014. India VIX indicates the Indian market's volatility from the investor's point of view. Volatility and the value of India VIX move together or in parallel. A higher value of India VIX indicates higher volatility expectations. This means that a significant change in Nifty and a lower value of India VIX will result in a minimal change or lower volatility expectation.
There is an inverse relation between India VIX and Nifty. The India VIX represents the risk factor in the stock market. Therefore, an increase in India-VIX means an increase in risk. Therefore the market falls. If the India VIX is decreasing, then it means that the market should go up due to the low-risk factor in the market.