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India VIX hits 40; why it matters to traders?

The India VIX (Volatility Index in short), is a measure of the expected volatility in the stock markets. It is also seen as an index that reflects the level of fear among market participants.

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By Mangalam Maloo  May 18, 2020, 12:42:42 PM IST (Published)

India VIX hits 40; why it matters to traders?

The India VIX (Volatility Index in short), is a measure of the expected volatility in the stock markets. It is also seen as an index that reflects the level of fear among market participants.

During periods of calm, the India VIX hovers anywhere between 15-17 and it goes as low as 12-13 during periods of extreme comfort in the market.

However, ahead of big events and during periods of turbulence, the India VIX just like the US counterpart CBOE VIX is known to see sharp swings.

Traders track this index closely, to figure out the level of fear in the system and that is a key consideration for traders who write options contract on the index and specific stocks. Options writers seek a high premium during times of high VIX as the market is expected to be volatile. Remember, options writer is obliged to honour the contract if the buyer of that contract chooses to exercise it.

Typically, professional traders write options contracts when the VIX is high because they can command a steep premium. Of course, the risks too are high in a volatile environment. Conversely, they choose to buy options when the market is not volatile because they get to buy options cheaply. So they get a shot at outsized returns, if the market moves in the favour, for a small price. Once again, in a stable market, it is usually the options writers who win most of the time as the prices stay within a range.

Options trading—buying or selling—is best left to professional traders with advanced analytic tools and large risk appetites.

At 40, the India VIX is higher than what it was just before the results of the 2019 General Elections were announced. But it is still less than half of the 86 levels see two months back when then Nifty crashed to 7511 and Lockdown 1 was announced.

The highest India VIX has hit in recent memory was during the Global Financial Crisis of 2008, where it climbed to 92.53 on November 14, 2008.


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