Significance of India Volatility Index

Over the last 1.5-2 months, since the news of the IL &FS debt crisis came into prominence, Indian markets have corrected very sharply. The fall has been exaggerated in the small & mid cap space where the majority of the stocks have corrected by around 50-60 % from the January 2018 highs.

This has generally led to a lot of margin calls being triggered in the futures market resulting in several investors losing in millions. What has really hit traders & investors hard has been the pace or the volatility in the market with certain stocks like Yes Bank or DHFL having an average swing of around 5-10% everyday. If you have been a futures trader over these few months and have still managed to make money, you should be proud of your achievement as like speed, volatility generally kills! But can we measure volatility? Yes, through the India VIX which measures the volatility of the overall market.

Volatility means swings both on the higher & the lower end. Please find below the chart of the India VIX.

https://invst.ly/8wf1m

As you can see, the volatility index after a brief correction last week has again increased this week. This means, one can expect wild swings in individual stocks & the index. However, a bearish volatility index chart generally indicates a more stable market and helps traders & investors enter Buy/Short positions with a little more ease.

If I have to sum this up in a formula, it would be mean:

  • Steady volatility index reading ( generally 8-13%) with rise in index/stock prices = Steady bull market
  • Steady volatility index with fall in index/stock prices= Steady bear market

In such situations of extremely high volatility, one should rather trade in options as it would help us achieve moderate profits with far lesser risk as compared to the futures market. If the strike price IV is really high, one could make huge money even with Out of the Money Calls & puts whereby investment is lesser as compared to margins currently being charged in the futures market.

With upcoming state & general elections ahead, increasing oil price concerns & a global trade war situation bound to escalate further, traders should rather adopt a more cautious approach & keep booking intraday profits from time to time maintaining strict stop losses. But always remember, once the storm passes by, if you survive this tumultuous period of volatility, you will be rewarded with excellent returns in the future as like bad times, bear markets & volatility also do not last long!

22nd October 2018

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