Volatility Index is a key measure of market expectations of near term volatility . As we understand, volatility implies the ability to change. Thus when the markets are highly volatile, market tends to move steeply up or down and during this time volatility index tends to rise. Volatility index declines when the markets become less volatile. VIX is sometimes also referred to as the Fear Index because as the volatility rises, one should become fearful or I would say careful as the markets can move steeply into any direction.

VIX level of below 15 is seen as stability to the market, while a figure above 15 indicates high volatility .

Volatility refers to the amount of uncertainty or risk about the size of changes in a security or index value. A higher volatility means that a security’s value can potentially vary over a larger range of values. This means that the price of the security can change dramatically.

VIX indicates the market’s perception of the expected near term volatility . All securities, indices are subjected to volatility and thus the studying them can be helpful because, options prices are chiefly governed by the volatility in the market.

Calculations:

NIFTY options order book of current month and next month, calls and puts increase in average premiums and discounts are determined to calculate the VIX Index.. India VIX is computed using the best bid and ask quotes of the out-of-the-money near and mid-month NIFTY option contracts, which are traded on the F&O segment of NSE. There are several factors which are used to calculate the index. Some important ones are these Greeks: Time to Expiry, Interest Rates, The Forward Index Level, Bid-Ask Quotes, and Weightage.

Then the variance for the near and mid-month expiry computed separately are interpolated to get a single variance value with a constant maturity of 30 days to expiration. The square root of the computed variance value is multiplied by 100 to arrive at the India VIX value. In a nutshell or in short, from a usage point of view, higher the VIX index value, higher the volatility .