Trading and Investing

Trade Fear in the Indian Markets: INDIA VIX FUTURES

The National Stock Exchange (NSE) is coming out with futures contracts for the India Volatility Index (India VIX) which will be launched on 26th Feb, 2014. This is seen as a good hedging tool for traders and investors. The VIX is not a new concept in the markets and it has been here for the last 2 decades starting from the "Chicago Board of Options Exchange" in 1993 with trading in it beginning in 2004. It was launched in 2008 in India and this move sets another benchmark set by the NSE in it's pursuit to take the Indian Markets at par with the International Markets.

VIX helps gauge FEAR.
India VIX is calculated using the BID and ASK prices of Out-Of-Money options contracts of Nifty in the present and near month contracts and it indicates the market's perception of the annual volatility in the next 30 calender days. Higher the VIX, higher the expected volatility. Let's understand this with the help of an example:
Say the INDIA VIX is at 15. This means that the markets expects an "annual change" of 15% in Nifty over the next 30 days. If you want to now calculate the monthly volatility then divide 15 by the Square Root of 12 as 15% is annual and not monthly. This now means that the market expects nifty to move in a 4.33% range for the next 30 days and options above and below this range will expire worthless.

Is VIX trading popular?
Since it's introduction in 2004, the VIX has seen the volume rise from 24 million contracts in 2007 to 183 million contracts in 2013.
Rise in the Annual Volume of VIX Contracts in CBOE
Historical Data for INDIA VIX is available from March '09. Below chart is a weekly chart of INDIA VIX.
India VIX - Weekly
Source: ChartInk
We are yet to receive details on the LOT size from NSE and as per the news now, the contract size will be Rs. 10 Lakhs and the tick size will be 0.0025 (Price will be displayed x100 i.e, if VIX is at 15, the price will be shown 15x100 = 1500). SO if you want to BID at 15.0025 for VIX, you will punch in 1500.25 as your BID. The margin needed is 14% (9% initial + 5% exposure).
Our brokerage is offering a "Zero-Brokerage" offer for all trades on India VIX till 1st June, 2014 for all our clients to try out this new product. To read more about our brokerage click here.
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