The National Stock Exchange (NSE) has introduced the volatility index Futures ,coded as INDIA VIX Futures, in February.Before it,Volatility Index Futures are listed at Chicago Board of Options Exchange (CBOE) and VSTOXX by Eurex.India VIX is the India’s first volatility index.Volatility is the measure of fluctuation a security can show in its price in a period.So VIX will represent investors perception of volatility in the markets in the near term.
Volatility has the inverse relation with the market movements.When markets are rising,the volatility tends to move lower while volatility rises when markets fall.Volatility is also the indicator of fear factor in the markets.Thus a higher volatility levels are indication of impending fall in the price of stock or index.These days markets are on bull run and the volatility levels are hovering around their lowest levels of 13-14.Annual average of the volatility for markets have been between 13-35 in the past year.
VIX is calculated based on the best bid and ask prices of the Options Contracts of Nifty Options for the near and next months contracts.The value for volatility shall be calculated up to 4 decimal places so as to calculate the most accurate influence the market volatility can put on portfolios.As per information available from NSE website,there will be weekly contracts for VIX.Each contract will expire on every Tuesday.Tick size for the move is 0.25 and the prices will be displayed in the multiples of 100. For example , if the volatility is trading at 14.1450 , it will be shown as 14.1450 X 100 = 1414.5.Lot size has not been determined yet but it is estimated that the contract value shall be around ₹ 10,000,00.The large size of the contract value as compared to currently traded contracts of other instruments may make it unsuitable for small traders.The small moves in the underlying shall lead to very large moves in the value,thus profits or losses can be large with very small moves.The trading hours are 9:15am-3:30 pm and settlement shall be daily on the basis of Marked-to-Market (MTM) settlement.
Uses of India VIX Futures : –
India VIX futures is likely to be very useful for big investors and fund managers who hold big portfolios.This will add the much needed versatility in trading and portfolio management for them. Few advantages of Trading in Volatility Index are –
1. Portfolio Hedging – Earlier big fund managers and investors used to hedge their portfolios from adverse market movements by using Nifty Options.VIX will provide them another instrument to protect their portfolios which shall more sensitive than Nifty Options as they shall be directly hedging by taking positions in Volatility Index.
2. Portfolio Diversification : – VIX shall enable them directly go long or short for trading purposes.Very short contract lengths will be of benefit when they want to play with short term volatility like before the announcements of election results,corporate results or central bank meetings.