Killer use of India VIX for Nifty Trading

The huge uncertainty is going on in the stock market. The credit must go to the Volatility that is floating at the all-time high. How one can say Volatility is at the all-time high as we all know Volatility has mean-reverting characteristic. Volatility is ranging it’s never trending however, nowadays volatility is trending.

Nifty and Bank Nifty have witnessed a significant surge in the Volatility that can be measured through the Volatility Index - India VIX.

 

What is volatility index VIX or India VIX?

Volatility measures the risk of a security. It is used in option pricing formula to gauge the fluctuations in the returns of the underlying assets. Volatility indicates the pricing behaviour of the security and helps estimate the fluctuations that may happen in a short time.

If the prices of a security fluctuate rapidly in a short period, it is termed to have high volatility. If the prices of a security fluctuate slowly in a longer time, it is termed to have low volatility. 

Volatility index shows the fluctuations happen due to Volatility. The Indian Volatility index is known as the India VIX.

How is volatility measured?

India VIX is the measure of volatility for the Indian share markets. The chart of VIX is also available on NSE or any Broker platforms. So, one can check the real-time value of VIX.

There are many indicators in markets such as Bollinger Bands used to track the volatility. People also use Implied Volatility Rank (IVR) or Implied Volatility Percentile (IVP) to gauge the level of volatility.

I personally use Box Plot to find out the numbers. I feel the box plot is better than IVR and IVP because if there is any spike comes in Volatility - IVR will take at least 90 days to reflect it into the Rank. In the Box Plot, I don’t need to wait for this much. Any outlier data can be caught at the time that it comes.

Importance of VIX

Price and Volatility are inversely proportional for a stock or index. Thus, when the VIX falls, it indicates the lower uncertainty in the market. In other hands, rising VIX shows greater uncertainty in the market.

Volatility is the forward-looking tool that able to catch the bottom and top of a scrip. The highest volatility coincides with the bottom and the lowest VIX indicates the top.

VIX and Nifty

In this January, Nifty made an all-time high. Have you noted the VIX that time? For your reference I am posting Nifty Chart and VIX line graph plot with data range from 1st of Nov 2019 to 31st Jan, 2020.

Nifty 1D Chart

If you notice the Chart you will find the Nifty has made all-time high recently. Now VIX graph for you:

I have taken three-month data from 1st November, 2019 to 31st January, 2020 and plotted. If you notice VIX has made a low below 11. This low has been made between Dec19 and Jan 20. This was the period when Nifty was at around all-time high. See, the Nifty graph given above.

Now, a Box Plot of VIX for Data range from 1st Jan 2016 to 19th March 2020.

Box Plot for India Vix

See the current level of India VIX, it is at 72.19 - this data is an outlier. You can see the lone bubble. The highest ever VIX and again see the graph of Nifty, we are near 8000. With lowest VIX, we were around 12400. Once VIX started rising, Nifty started falling and with the highest VIX Nifty has broken 8000.

The another data that I would like to share, related to the 2008 crisis and VIX. At that time we had CBOE VIX.

Current CBOE VIX 

Data range for above CBOE VIX Box plot is from 1st Jan 2000 to 19th March 2020. Also check the current CBOE VIX which is well above 80, shows outlier as well as black swan event for CBOE. It is an all-time high and huge sell-off is going on in the global market including the Indian Market. Now, see this box plot of 2008 for CBOE VIX:

CBOE VIX 2008-2009

Data range: 1st Jan 2008 to 31st March 2009.

If you notice the bubbles that show VIX was above 80 all-time high at that time and the crisis in 2008.

How to trade VIX?

VIX is a ranging instrument and always tries to attend the mean. The range is 10 to 20 generally and mean is around 15. You can check this in box plot as well. When VIX is at its higher-end, it tries to cool down thus option sellers can use this opportunity for option selling. Option buyers can use low VIX for buying option as with rising VIX, premium rise.

Apart from this, when VIX breaks it’s range and started moving higher high, it brings uncertainty in the market with that huge sell-off.

These posts can be recommended for you.
How to monetize Volatility
Volatility Rank and Volatility Percentile
How to read Option data for trading