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10thingstoknowaboutIndiaVixFutures|BusinessStandardNews

10thingstoknowaboutIndiaVix
Futures
IndiaVixisavolatilityindexbasedonpricesofNiftyoptions
ShishirAsthana|Mumbai
February26,2014LastUpdatedat11:39IST

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Tradersareoftenlookingfornewstrategiestotradeamajorevent,say
abudgetorcreditpolicyorevenimportantresultslikeInfosys.
Normallyatraderwouldhavebought,whatanoptiontradercallsa
LongStraddlestrategy.Inenteringthisstrategy,hewouldbuyalong
callandalongputoptionofthesamestrikepriceandsameexpiry.

Inordertoearnprofitsfromsuchastrategy,marketsneedtomove
sharplyineitherdirectionsuchthatprofitfromonedirectionwouldbe

ALSOREAD
Topbrokeragesremain
bullishonInfosys

morethanthelossfromtheotherone.However,thestrongfollowingof
suchastrategyleavesverylittleonthetable(ifatall)aspricesofboth
thecallandputoptionrisebeforetheeventastheyallfeartheextreme.

ABBIndiahits52week
highonheavyvolumes

BSEmetalindexhitsfour
monthlow

India'spremierexchange,NationalStockExchange(NSE)is

SanofiIndiagainsafterQ4
netrisesover100%

volatility.IndiaVixisavolatilityindexbasedonpricesofNiftyoptions.

SBIgainsoninterim
dividendplan

ALSOREAD:Volatilityfuturesnotforretailinvestors

Traderswillnowhaveaninstrumenttoearnfromsuchaneventuality.
launchingIndiaVixFuturestoattracttraderswhoarewillingtobeton

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Volatilityisknownasameasureofchange.Ahighervalueofvolatility
indicatesthatpricescanchangeatafasterpace(eithergoingupor
down)ascomparedtotheimmediatepast.
BeforeyoustarttradingtheIndiaVixfuturescontract,hereare10
pointstoconsider

1.Globallyknownasa'fearindex',Vixisactuallyoneofthebest
contrarianindicatorsintheworld.ChicagoBoardOptionsExchange
(CBOE)whichownstheVixtrademarksaythatsincevolatility(high)
oftensignifiesfinancialturmoil,Vixisoftenreferredtoastheinvestorfeargauge.Theindexiscolloquially
referredtoasthefearindex.

2.InIndia,valueofVixhasbeencomputedbytheNSEsinceNovember2007basedontheoutofthemoney
(OTM)optionpricesoftheNifty.Ithastouchedahighof85.13andalowof13.04.Asitismentionedin
percentages,valueofVixcanneverbebelowzeroormorethan100.

3.HistoricaldataindicatesthatIndiaVixhasastrongnegativecorrelationofnegative0.8totheNifty.This
meansthateverytimeVixfalls,Niftyrisesandeverytimeitrises,itmeansthatafallisimminent.IndiaVix
touchedavalueof85percent,afewdaysbeforeNiftytouchedabottomposttheLehmanCrisis.

4.IndiaVixhasameanof26.65andamedianof23.83,thesefiguresareimportantforoptionwritersand
traderssinceVixhasatendencytoreverttothemean.

5.TheIndiaVixfuturescontractwillhaveaweeklysettlementandhavethreerunningcontractsalongwith
threespreadsbetweenthecontracts(spreadsarethedifferenceinpricesbetweentwocontracts).Oneneed
nothavethevisionofaplanningcommissionoraeconomisttotradethecontracts.Asmallervisionofone
weekoramaximumofonemonthisgoodenoughtodeterminethevolatility.ShortertermVixindicesaremore
responsivetoshorttermvolatilitywhichwillbeinducedduetocorporateearnings,governmentpolicy
announcementsorRBI'spolicychanges.

6.Volatilityiseasiertopredictthanprice.OnewillnotknowthepriceofInfosysafteritannouncesitsresults,
butitiseasiertoknowthatvolatilitywillincreaseimmediatelyafterprofitandguidancenumbersareannounced
bythecompany'smanagement.

7.Vixfuturesarealsoconsideredtobeabetterhedgethanaindexfuture.ThisisbecauseVixindicesaremore
volatileandofferedthreetofourtimesmorereturnsthananassetbasedindex.Therecent5.4percentdropin
theNiftybetweenJanuary23rd2014andFebruary13,2014resultedina14.8percentchangeinthevolatility
index.

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8.Thehighgainsarepreciselythereasonwhyspeculatorsareattractedtowardsit.NSEhowever,haskeptthe
lotsizeforeachcontractataroundRs10lakhwhichwillattractamarginofRs2lakh,thusmakingtheproduct
moreexpensivefortheretailinvestor.

9.CurrentlyIndiaVixisinthelowestquartile,whichpartlyexplainstheNiftytradingwithinthreepercentofits
alltimehighpoint.

10.Inordertopromotethefuturescontract,NSEisofferingrebaterangingbetween10and40percentin
transactioncharges,dependingontheoverallvolume.

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