Have you ever heard of VIX? Do you understand the various things related to VIX? Never mind, don’t lose your heart if the answer to any of the above questions is negative. VIX is basically a trademark of Chicago Board Options Exchange (CBOE). The first exchange in the world to have volatility index way back in 1993 is CBOE. However, the future and options trading on VIX trading platform started in 2004 in Chicago. It is for your information that the India VIX is a replica of the CBOE VIX.
Understanding India VIX
India VIX is a volatility index and the values are based on the index option prices of Nifty. The value for the India VIX is computed by utilizing the best bid and ask quotes of the out of the money, present and next month’s Nifty option contracts. The India VIX is designed to highlight the perception of investors on the annual market volatility for next 30 calendar days. The higher value of India VIX is suggestive of the higher expected volatility and similarly the lower value of India VIX indicates low expected volatility. If the value for India VIX is say, 15.75, then it indicates that the expected annual change in the Nifty over next 30 days will be 15.75%., i.e. the expected value of Nifty will be in the range of +15% to -15% from the present 1 year price of Nifty for next 30 days. The futures trading on India VIX has started since February 2014. A high value of India VIX indicates that the large movements are expected in Nifty.
How trading is done on India VIX?
Just like Nifty, India VIX is an index and by virtue of an index, one cannot trade on it unless and until they have derivative contracts on them. Here the derivative contracts are used to specify both, futures and options. The India VIX futures allow the traders to hedge their volatility risks and can use it to speculate in the market. The following are the specifications of India VIX future contracts:
- The lot size is 550
- Its symbol is INDIAVIX
- The values will be calculated up to 4 decimals
- The quotation price on India VIX will always be in the multiple of 100s. If for example, a trader wants to trade at the India VIX futures at 18.2871 then the price that will be quoted to him will be Rs. 1828.71 (18.2871*100).
- The normal trading hours are from 9:15 am to 3:30 pm
- Every week, Tuesday is the day that has been selected as expiry day
- The normal contract cycle is 3 weeks
- Closing price of the underlying India VIX index is considered as the final settlement price
- The transactions are settled in cash
- The initial margin is kept at 9% and exposure margin is 5%, i.e. the total margin will be 14% of the contract value
How to use India VIX futures?
When the markets are going down and the volatility is increasing, then it is an indication to buy India VIX futures. If looking at the 4 years range, you find that the India VIX is at the top, i.e. somewhere near to 35 then you can expect it to go at a lower side. This is a situation when you can short India VIX futures.
I hope that at an initial level, these small details on the India VIX will help you to understand the basics and learn more about it.