Financial media outlets and investors across the globe closely follow fluctuations in the sentiment indicator. Have you asked yourself a simple question: what just may be the most closely followed sentiment indicator in the Indian and the US market? To find answer to this and know more about sentiment indicators, follow me…
Allow me to assume that you have at least heard of VIX. Yes, most closely followed sentiment indicator is VIX, also known as “fear gauge”. In US market, it is known as the CBOE Market Volatility Index (US VIX); US VIX was launched in 1993 to track volatility in the market. Indian counterpart of the same is known as India VIX, launched in 2008 by the National Stock Exchange (NSE). Higher the value of India VIX index, higher the expected volatility and vice versa. Both US VIX and India VIX follow same calculation methodology. VIX has recently become an asset class in itself because of its negative correlation with the underlying index or market.
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Chart 1: India VIX Vs Nifty
Good news is that India VIX futures will be available for trading from 26th Feb 2014 according to the National Stock Exchange of India (NSE) and hence investors and traders can now trade India VIX futures.
Calculation of India VIX is similar to computation methodology adopted by CBOE and includes following factors:
- Time to expiry
- Risk free interest rate (NSE MIBOR rate for 30 days or 90 days)
- Out of the Money (OTM) Nifty options identified using forward index level are used
- Bid Ask quotes of OTM Nifty option contract which are identified using At the Money (ATM) Strike
Investors/traders should keep track of these factors to evaluate/value India VIX futures; this can be traded during same market hours as that of the regular Future & Options (F&O) segment.
Values of India VIX futures will be computed up to four decimals; the contract’s price will be quoted as the expected India VIX index value multiplied by 100. For example, if one wants to buy a VIX futures contract at 19.1002, the price will be quoted as 1910.02. Further, the value of one contract will work out to 1* 1910.02* lot size.
All traders/investors with a trading account can trade on India VIX futures. Transactions would be cash settled and the settlement will take place on T+1 basis, along with other derivatives contract. Also, Spread contracts will be available for rollover. Also STT is also applicable on VIX futures, which will be the same as applied on Index Futures.
Investors/traders should take note of below mentioned product/contract specification:
|Symbol of underlying||
Every Tuesday of the week
Weekly – 3 serial contracts. New future contract will be introduced for every week
Minimum Rs.10 lac at the time of introduction
INDIA VIX Index*100
|Daily close price||
Volume weighted average of future price of trades in last 30 minutes
Will be computed up to 4 decimals with a tick value of 0.0025
Further, investors/traders can use/trade India VIX futures in following way:
- Hedging Portfolio: one can hedge his/her portfolio by buying VIX future as it has negative correlation (inverse relationship) with broader stock market index such as Nifty (Nifty and India VIX have negative correlation of c0.58 over last four years). So, a trader who expects prices of his/her stocks to fall can go long on India VIX futures contract and cover his/her risk.
- Hedging gamma: One can take position on VIX future based on his/her Option Portfolio and can hedge his/her gamma.
- Speculation: One can have a view on expected volatility and trade VIX futures based on it.
- Spread trading: An arbitrageur can also indulge in spread trading on VIX futures.
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Finally, investors/traders should also be cautious of the limitations of VIX futures which are as below:
- VIX Future is a very volatile product with expected volatility of at least 5% in a single day
- Life of the contracts is just 21 days (VIX future is only for short term volatility).
- Index futures and VIX futures will not expire on the same day leading to difficulty in making arbitrage trade.
- Rollover of the contract may prove to be expensive due to imposition of STT every week.
- To summarize, India VIX futures is a new investment/trading opportunity but it should be traded carefully.
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