In an interview with Moneycontrol, derivatives expert Rahul Ghose, CEO of Hedged.in, shares his insights into his interpretation of India Vix and the implications of the sharp swings.
Edited excerpts:Story continues below Advertisement Remove AdWhat do the sharp movements seen in the India Vix imply?
Typically, when the India VIX is within the 10-12 range, it is considered low, while a VIX level above 20 is considered high.
The recent days have witnessed the markets rallying by 400 points alongside a 30 percent rise in the India VIX.
As we head into elections, what does a rising VIX signify?
Rahul Ghose, CEO at Hedged.in
The India Vix, also known as the Fear Index, has drawn attention in recent weeks due to sharp swings on either side. On May 3, the India Vix surged by 12.66 percent, trading at 14, and has risen by as much as 32 percent in six trading sessions. Just a few weeks ago, the Vix touched a five-month low of 10.85. The question arises: what should investors make of these moves in the volatility index?
In an interview with Moneycontrol, derivatives expert Rahul Ghose, CEO of Hedged.in, shares his insights into his interpretation of India Vix and the implications of the sharp swings. Edited excerpts:
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What do the sharp movements seen in the India Vix imply?
Typically, when the India VIX is within the 10-12 range, it is considered low, while a VIX level above 20 is considered high. The recent days have witnessed the markets rallying by 400 points alongside a 30 percent rise in the India VIX. While it's natural for the India VIX to rise before elections, if the VIX continues to ascend beyond 18 amidst ongoing market rallies, one must exercise extreme caution.
What is India Vix indicating today, and should investors be worried?
India VIX exhibits a strong negative correlation with the Nifty. Currently, the VIX hovers around 14, with 18 nearly 35 percent away. At today's trading session's open, Nifty found itself in overbought territory, and a price above 22,700, coupled with a rising VIX, signalled a potential downward move. Hence, significant profit booking was observed in the second half of the day.
As we head into elections, what does a rising VIX signify?
The larger the upward move coupled with an increase towards or beyond 18, the more significant the expected Index fall. For instance, if Nifty surpasses 23,200 pre-election with the VIX at 18 or higher, one should brace for at least a 2000-point correction on the Index. In such scenarios, the timing of the fall can be optimized using candlestick patterns and the Keltner channel for optimum results.
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It is advisable to combine the India VIX with price action and other uncommon indicators for better results.
How is India Vix calculated?
India VIX is the index indicating the Indian market’s volatility, calculated by using the weighted average of the OTM puts and calls in the market. Volatility and the value of India VIX move parallelly. A higher value of India VIX indicates higher volatility expectations, i.e., a significant change in Nifty, while a lower value indicates lower volatility expectations, i.e., a minimal change in Nifty.
Also read: F&O Manual | Indices trade negative; Nifty breaches crucial support of 22,550
How should one interpret VIX?
India VIX has a strong negative correlation with Nifty, serving as an indicator of sentiments. When VIX is high, volatility is extremely high, often resulting in sharp price declines. This scenario inflates options premiums, benefiting options sellers. However, it also induces fear among investors, prompting them to exit positions to curtail losses. Ironically, this marks the point where prices bottom out. Conversely, low VIX values signify reduced volatility. Investors tend to become complacent amid rising indices, succumbing to greed and buying near market peaks, ultimately getting trapped.
Do you advise leveraging VIX as an indicator for contrarian bets?
An astute investor or trader can utilize the VIX indicator contrarily, avoiding typical mistakes. Higher VIX levels indicate market bottoms, while lower VIX levels denote market tops. Therefore, investors should exercise vigilance when India VIX is low, as rising markets can reverse course. They should scrutinize bearish candlestick reversal signals before exiting positions. Conversely, when India VIX is high, it presents an ideal opportunity to enter the market, with potential for price reversals, provided investors identify bullish candlestick reversal signals before entering positions.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
