Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in and Co-Creator of Algomojo (Algorithmic Trading Platform for DIY Traders)

Difference Between India VIX and Implied Volatility

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India VIX (India Volatility Index) is a measure of the market’s expectation of volatility in the Indian stock market over the next 30 calendar days. It is calculated using the prices of the Nifty 50 index options. A higher value of India VIX indicates that the market expects a higher level of volatility in the stock market, while a lower value suggests that the market expects relatively lower volatility.

IndiaVIX Historical Daily Charts

It is important to note that the India VIX is a forward-looking indicator, so it reflects the market’s expectations of future volatility rather than actual historical volatility.

  1. A high India VIX value indicates that the market is expecting a high level of volatility in the near future. This could be due to factors such as uncertainty about economic conditions, political events, or other market-moving events.
  2. A low India VIX value, on the other hand, indicates that the market is expecting relatively low levels of volatility in the near future. This could be due to factors such as a stable economic environment or a lack of significant market-moving events.

Implied volatility, on the other hand, is a measure of the expected volatility of a particular security or market index, as implied by the prices of options on that security or index. It is derived from the prices of options using mathematical models such as the Black-Scholes model. Implied volatility represents the market’s expectations of the future volatility of the underlying security or index, and is used by options traders to help determine the appropriate price for options contracts.

Implied Volatility Charts – Nifty

So, while India VIX reflects the market’s expectation of volatility in the Indian stock market as a whole, implied volatility pertains to the expected volatility of a specific security or market index.

Gauging the Market Sentiment using Implied Volatility

Implied volatility can be a useful tool for gauging market sentiment because it reflects the market’s expectations of future volatility of a security or market index. Generally, higher levels of implied volatility indicate that the market expects a higher level of price movement, which can be an indication of increased uncertainty or risk. On the other hand, lower levels of implied volatility suggest that the market expects relatively stable price movement, which may indicate lower levels of uncertainty or risk.

Here are some ways to use implied volatility to gauge market sentiment:

  1. Compare implied volatility to historical levels: If the implied volatility of a security or market index is significantly higher than its historical levels, it may indicate that the market is expecting increased price movement and uncertainty. Conversely, if the implied volatility is significantly lower than its historical levels, it may suggest that the market expects relatively stable price movement.
  2. Compare implied volatility across different securities or market indices: If the implied volatility of one security or market index is significantly higher than that of another, it may indicate that the market expects greater price movement or uncertainty for the security or index with the higher implied volatility.
  3. Compare implied volatility to the current price of the security or market index: If the implied volatility of a security or market index is higher than its current price, it may indicate that the market expects the price to move significantly in the future. Conversely, if the implied volatility is lower than the current price, it may suggest that the market expects relatively stable price movement.
Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in and Co-Creator of Algomojo (Algorithmic Trading Platform for DIY Traders)

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