NSE launches volatility index, India VIX
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K.Karthik Raja
Apr 9, 2008, 6:57:08 AM4/9/08
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NSE launches volatility index, India VIX
The National Stock Exchange has launched a volatility index reflecting
the market's expectation of volatility over the near term, which is
the next 30 day period.
The chairman of the Securities and Exchange Board of India, C B Bhave,
who launched the index called India VIX, captures the implied
volatility embedded in options prices. The index is based on the Nifty
50 Index Option prices.
"The advantage of measuring things is to first define them. The
volatility index will increase the understanding among people. Once
that happens, we will be ready to launch products based on it," said
Bhave.
From the best bid-ask price of Nifty 50 Options contracts (traded on
the F&O segment of NSE), a volatility figure (percentage) is
calculated, which indicates the expected market volatility over the
next 30 days. Higher the implied volatility, higher the India VIX.
Implied volatility as captured by the volatility index refers to the
implied risks associated with the stock markets and not the size of
the price swings. 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.
Conversely, 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 introduction of the index would add volatility as an asset class
to the investor's portfolio," said Ravi Narain, managing director and
CEO, NSE.
Investors could hedge their portfolios against volatility with an
offsetting position in India VIX futures or options contracts. The
implied volatility information that the index gives can also be used
in identifying mispriced options.
"Greater the liquidity in the options segment, better the index. There
are also plans to introduce an intra-day volatility index once this
one 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.
In January, Sebi had given the green signal for the launch of
volatility index by both the exchanges. "Based on the experience
gained and awareness generated, derivatives on Volatility Index shall
be considered for introduction in due course of time," the Sebi
circular had said.
However, NSE is the first exchange to launch such an index in India.
The National Stock Exchange has launched a volatility index reflecting
the market's expectation of volatility over the near term, which is
the next 30 day period.
The chairman of the Securities and Exchange Board of India, C B Bhave,
who launched the index called India VIX, captures the implied
volatility embedded in options prices. The index is based on the Nifty
50 Index Option prices.
"The advantage of measuring things is to first define them. The
volatility index will increase the understanding among people. Once
that happens, we will be ready to launch products based on it," said
Bhave.
From the best bid-ask price of Nifty 50 Options contracts (traded on
the F&O segment of NSE), a volatility figure (percentage) is
calculated, which indicates the expected market volatility over the
next 30 days. Higher the implied volatility, higher the India VIX.
Implied volatility as captured by the volatility index refers to the
implied risks associated with the stock markets and not the size of
the price swings. 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.
Conversely, 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 introduction of the index would add volatility as an asset class
to the investor's portfolio," said Ravi Narain, managing director and
CEO, NSE.
Investors could hedge their portfolios against volatility with an
offsetting position in India VIX futures or options contracts. The
implied volatility information that the index gives can also be used
in identifying mispriced options.
"Greater the liquidity in the options segment, better the index. There
are also plans to introduce an intra-day volatility index once this
one 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.
In January, Sebi had given the green signal for the launch of
volatility index by both the exchanges. "Based on the experience
gained and awareness generated, derivatives on Volatility Index shall
be considered for introduction in due course of time," the Sebi
circular had said.
However, NSE is the first exchange to launch such an index in India.
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