Like better late than never being a new innovative idea in the Indian markets, the National Stock
Exchange or NSE has announced the launch of India VIX, a volatility index based on the Nifty 50 Options prices, thus reflecting the market’s expectations of volatility over the near terms. The Chairman of the Securities and Exchange Board of India, C.B. Bhave has launched the India VIX. NSE is the first exchange to launch such an index in India.
This index (India VIX) captures the implied volatility embedded in option prices. Volatility index is a measure, of the amount by which an underlying index is expected to fluctuate, in the near term (calculated as annualized volatility, denoted in percentage) based on the order book of the underling index options. Market volatility keeps on changing as and when new information flows into the market. Therefore, it would be essential for market participants to have an index designed to track market volatility.
The India VIX is a simple but useful tool aimed to assist investors in regulating the overall volatility of the market. The volatility index is not only used as an indicator of implied volatility of the market but also provides information on various tradable products, such as futures and option contracts, on the volatility index worldwide.
NSE said it has no plans to introduce tradable products based on the India VIX in the immediate future. It wants the market participants get used to understanding and tracking the India VIX number and what it implies to do.
Implied volatility as captured by the volatility index refers to the implied risk associated with the stock markets and not the size of the price fluctuations. When the market is range bound or has a mild upside bias, volatility is globally observed to be typically low. On such days, call option buying (a position taken on the view that market will move lower) generally outnumbers put options buying (a position taken on the view that market will move higher), indicating lower risk.
On the other hand, when selling activity increases significantly, investors rush to buy puts, pushing the price of these options higher. This increased amount investors are willing to pay for put options shows up in higher readings on the volatility index. High readings indicate a higher market place but the volatility index can also be used as a contrarian indicator, since spikes in the volatility index are associated with a market fall.
The National Stock Exchange’s Managing Director and Chief Executive Officer, Mr. Ravi Narain, said the introduction of the index would add volatility as an asset class to the investor’s portfolio management.
Investors could hedge their portfolios against volatility with an offsetting position in India VIX future or options contracts. The implied volatility information that the index gives can also be used in identifying mispriced options. There are also plans to introduce an intra-day volatility index once this finds acceptance among market participants, said a senior NSE official.
Based on experience gained with the benchmark broad based index, sector specific volatility indices would be constructed to enable hedging by investors in those specific sectors, it said.
In January, SEBI had accorded approval for the launch of volatility index by both the exchanges. Based on the experience gained and awareness generated, derivates on volatility index shall be considered for introduction in due course of time, the SEBI circular said.
Presently, India VIX would be calculated for the entire day and made available at the end of the day, on the website of NSE, www.nseindia.com. Subsequently, the index would move to on-line dissemination.
Posted by krishna Raj 