Volatility Index

Gold VOLATILITY INDEX
A MEEAASSUURREE FFO
ORR IN
NVVE TO
ESST RSS…???
OR
Ghalla Bhansali Stock Brokers Pvt. Ltd. 14th May, 2009
Volatility refers to the amount of uncertainty or risk about the size of
Mahesh Babaria
maheshb@ghallabhansali.com changes in a securityʹs value. A higher volatility means that a securityʹs value
can potentially be spread out over a larger range of values. This means that the
Mittal Dharod price of the security can change dramatically over a short time period in either
mittald@ghallabhansali.com
direction. A lower volatility means that a securityʹs value does not fluctuate
dramatically, but changes in value at a steady pace over a period of time.
Volatility denotes the extent to which the value of our investment may be
subject to the mood of the market over a given period.

Volatility Index
Volatility Index is a measure of market’s expectation of volatility over
the near term. Volatility is often described as the “rate and magnitude of
changes in prices” and in finance often referred to as risk. Volatility Index is a
measure, of the amount by which an underlying Index is expected to fluctuate,
in the near term, (calculated as annualized volatility, denoted in percentage
e.g. 20%) based on the order book of the underlying index options.
Volatility Index is a good indicator of the investors’ perception on how volatile
markets are expected to be in the near term. Usually, during periods of market
volatility, market moves steeply up or down and the volatility index tends to
rise. As volatility subsides, option prices tend to decline, which in turn causes
volatility index to decline.
The Chicago Board Options Exchange was the first to develop volatility
index in 1993. The CBOE Volatility Index is a key measure of market
expectations of near‐term implied volatility conveyed by S&P 500 stock index
option prices. Implied volatility increases when the market is bearish and
decreases when the market is bullish. This is due to the common belief that
bearish markets are more risky than bullish markets.

Implied risks
The implied volatility, as captured by the volatility index, is not about
the size of the price swings, but rather the implied risks associated with the
stock markets. When the market is range‐bound or has a mild upside bias,
volatility is globally observed to be typically low. On such days, call option
buying (a position taken on the view that the market will move higher)
generally outnumbers put options buying (a position taken on the view that
the market will move lower).
This kind of market may indicate lower risk. Conversely, when the
selling activity increases significantly, anxiety among investors tends to rise.
Investors rush to buy puts, which in turn pushes the price of these options
higher. These increased numbers of investors are willing to pay for put options
shows up in higher readings on the volatility index. High readings indicate a
higher risk in the market place.
1 www.ghallabhansali.com
A MEEAASSUURREE FFO
ORR IN
NVVE TO
ESST RSS…???
OR
The reading of VIX reached almost 45 in 1998 as the LTCM (Long‐term
Capital Management) crisis exploded. It took a few months for the investor’s
fears to abate and the VIX to return to below 20. The World Trade Centre
bombing also made the VIX climb above 45, as the investors’ fear level reached
the peak.

India VIX
India VIX is a volatility index based on the Nifty 50 Index Option prices.
From the best bid ask prices of Nifty 50 Options contracts (which are traded on
the F&O segment of NSE), a volatility figure (%) is calculated (detailed
calculation methodology enclosed) which indicates the expected market
volatility over the next 30 calendar days. Higher the implied volatility higher
the India VIX value and vice versa. There are some differences between a price
index, such as the Nifty 50 and India VIX. Nifty50 is calculated based on the
price movement of the underlying 50 stocks which comprises the index. India
VIX is calculated based on the bid‐offer prices of the near and mid month Nifty
50 Index Options. Nifty 50 Index is an absolute number, e.g. 4500, 5000 etc.,
whereas India VIX is a percentage value (e.g. 20%, 30% etc.). Whereas Nifty 50
signifies how the markets have moved directionally, India VIX indicates the
expected near term volatility and how the volatility is changing from time to
time. The implied volatility as captured by the volatility index is not about the
size of the price swings, but rather the implied risks associated with the stock
markets. When the market is range bound or has a mild upside bias, volatility
is globally observed to be typically low. On such days, call option buying (a
position taken on the view that the market will move higher) generally
outnumbers put options buying (a position taken on the view that the market
will move lower). This kind of market may indicate lower risk. Conversely,
when the selling activity increases significantly, anxiety among investors tends
to rise. Investors rush to buy puts, which in turn pushes the price of these
options higher. This increased amount investors are willing to pay for put
options shows up in higher readings on the volatility index. High readings
indicate a higher risk market place. Volatility index can also be used as a
contrarian indicator. Various tradable products, such as futures and options
contracts are available on the volatility index internationally. The derivative
contracts on Volatility Indices allow investors to trade ‘volatility’. Volatility is
one among the various factors that affect the option prices. Volatility index
isolates expected volatility from other factors affecting option prices, such as
changes in the underlying price, dividends, interest rates, time to expiration.
As such the volatility index offers a way for investors to buy and sell option
volatility directly, without having to deal with other risk factors that would
have an impact on the value of an index option position.

A MEEAASSUURREE FFO
ORR IN
NVVE TO
ESST RSS…???
OR
Uses of Volatility Index

Volatility Index offers great advantages in terms of trading, hedging
and introducing derivative products on this index. Investors can use volatility
index for various purposes as mentioned below:
 Investors’ portfolios are exposed to the market volatility. Investors
could hedge their portfolios against volatility with an off‐setting
position in India VIX futures or options contracts.
 Volatility index depicts the collective consensus of the market on the
expected volatility and being contrarian in nature helps in predicting
the direction. Investors therefore could appropriately use this
information for taking trading positions.
 Investors could also use the implied volatility information given by the
index, in identifying mis‐priced options.
 Short sale positions could expose investors to directional risk.
Derivatives on volatility index could help investors in safeguarding
their positions and thus avoid systemic risk for the market.
 Based on the experience gained with the benchmark broad based index,
sector specific volatility indices could be constructed to enable hedging
by investors in those specific sectors.

Investors who are averse to volatility can hedge their portfolio by
purchasing derivative products based on the volatility index. And investors
with a good appetite for volatility can take the risk by selling the same
derivatives product. All in all, a volatility index provides a new game of
hedging and trading for market participants. But how is hedging through
volatility index derivatives different from hedging through single stock or
index derivatives? Well, hedging through single stock or index derivatives is
like purchasing a comprehensive insurance which covers many risks that you
may not be even aware of. But a derivative product based on volatility index
keeps its focus narrow—it provides a hedge against only market volatility.
So if the prices of your company’s shares are likely to fall due to poor
quarterly results, then purchasing volatility index derivatives may not protect
you. The market may remain calm even though your own individual portfolio
may be performing badly. This is because a volatility index does not measure
the volatility of a single instrument but uses a wide range of different
instruments.
So if the prices of your stocks are likely to fall due to poor market
sentiments and not due to any company‐specific reason, then a volatility index
derivative may be your right bet.

A MEEAASSUURREE FFO
ORR IN
NVVE TO
ESST RSS…???
OR
6000 80
70
5000
60
4000
50
3000 40
30
2000
20
1000
10
0 0
28-Nov-08
31-Jan-08
30-Jun-08
31-Jul-08
30-Jan-09
29-Feb-08
31-Mar-08
30-Apr-08
30-May-08
29-Aug-08
30-Sep-08
31-Oct-08
31-Dec-08
27-Feb-09
31-Mar-09
29-Apr-09
4-May-09
5-May-09
6-May-09
7-May-09
8-May-09
11-May-09
12-May-09
13-May-09
Nifty ViX
Indian stocks volatility index shows election fears

A two‐month surge in Indian stocks on optimism of improvement in
global fortunes could be tested by results of national elections due on May 16,
with a jump in a volatility gauge seen as a sign of rising investor worries.
The National Stock Exchangeʹs India Volatility Index, which measures
the expectation of near‐term volatility based on index option pricing, has
jumped 22.3 percent so far in May, while the more widely known U.S. CBOE
Volatility Index eased 8.4 percent this month up to Thursday.
The Indian stock market has recovered about 50 percent of its value
from 2009 lows hit in early March, swept up by a wave of investor optimism
on increasing confidence the global economy is on the mend.
But political uncertainties could play spoilsport if month‐long national
elections produce a fractured mandate when results are released on May 16.
We are facing an event that the world is not facing, and that is fuelling
the volatility,ʺ Hemant Thukral, vice president at Asian Markets Securities,
said. ʺThings will continue to be erratic in the near term because the event is so
big.ʺ
The worldʹs largest democracy went to polls last month, with the ruling
centre‐left Congress party coalition seen having a faint edge over a rival group
led by Hindu‐nationalist Bharatiya Janata Party (BJP).
Neither of the parties is expected to win an outright majority, and the
focus will be on possible coalition partners.
A MEEAASSUURREE FFO
ORR IN
NVVE TO
ESST RSS…???
OR
A tight race across India has sparked fears of a weak coalition
government that could delay pro‐market reforms as the country grapples with
the global economic crisis and security issues.
Political instability worries following elections have hurt the stock
market in the past, with the main BSE index plunging as much as 16.6 percent
on May 17, 2004, when the ruling BJP‐led group suffered a shock defeat and
the Congress party forged an alliance with the communists.
In 1999, after rising rapidly in the months ahead of the general election,
the market then eked out gains of just 0.1 percent in the following month.
ʺIt appears that a government which is perceived to be stable has a
positive impact on activity,ʺ Goldman Sachs analyst Tushar Poddar said in a
recent note.
ʺThe two elections in which activity declined were when neither of the
two major national parties ‐‐ the BJP or Congress ‐‐ were a part of the ruling
coalition,ʺ he said.
Apart from political risk, other factors seem to bode well for the stock
market. Economic growth is widely expected to pick up later this year, while
some valuations are still cheap and foreign funds appear eager to invest.
Foreign funds moved $1.5 billion into Indian stocks in April and $655
million in the first four days this week, but that could quickly reverse in the
face of political instability, analysts said.
ʺIf we have a weak coalition, there are going to be questions about how
long the government will last and if there is going to be a lot of fighting
between the various factions,ʺ said Sanjeev Prasad, co‐head of institutional
equities at Kotak Securities.
ʺBut the government needs to be concentrating on improving Indiaʹs
fiscal situation for the market to recover.ʺ

Finally Experts Say…
Volatility index can be used by both institutional and retail investors. If
an investor holds mutual fund units (equity linked) and finds that the
volatility index of NSE is moving above 45%, he can switch over from the
equity linked units to fixed income securities and vice versa. If you are an
investor with a long term view but saw the volatility index moving above 50%
then you can reduce equity investments and can stay liquid.

A MEEAASSUURREE FFO
ORR IN
NVVE TO
ESST RSS…???
OR
Disclaimer:
This document has been prepared by Ghalla Bhansali Stock Brokers Pvt. Limited(Ghalla
Bhansali ) . This document does not constitute an offer or solicitation for the purchase or sale
of any financial instrument or as an official confirmation of any transaction. The information
contained herein is from publicly available data or other sources believed to be reliable, but we
do not represent that it is accurate or complete and it should not be relied on as such.Ghalla
Bhansali or any of its affiliates/ group companies shall not be in any way responsible for any
loss or damage that may arise to any person from any inadvertent error in the information
contained in this report. This document is provided for assistance only and is not intended to
be and must not alone be taken as the basis for an investment decision. The user assumes the
entire risk of any use made of this information. Each recipient of this document should make
such investigation as it deems necessary to arrive at an independent evaluation of an
investment in the securities of companies referred to in this document (including the merits
and risks involved), and should consult his own advisors to determine the merits and risks of
such investment. The investment discussed or views expressed may not be suitable for all
investors. This information is strictly confidential and is being furnished to you solely for your
information. This information should not be reproduced or redistributed or passed on directly
or indirectly in any form to any other person or published, copied, in whole or in part, for any
purpose. This report is not directed or intended for distribution to, or use by, any person or
entity who is a citizen or resident of or located in any locality, state, country or other
jurisdiction, where such distribution, publication, availability or use would be contrary to law,
regulation or which would subject Ghalla Bhansali and affiliates/ group companies to any
registration or licensing requirements within such jurisdiction. The distribution of this
document in certain jurisdictions may be restricted by law, and persons in whose possession
this document comes, should inform themselves about and observe, any such restrictions. The
information given in this document is as of the date of this report and there can be no
assurance that future results or events will be consistent with this information. This
information is subject to change without any prior notice. Ghalla Bhansali reserves the right to
make modifications and alterations to this statement as may be required from time to time.
However, Ghalla Bhansali is under no obligation to update or keep the information current.
Nevertheless, Ghalla Bhansali is committed to providing independent and transparent
recommendation to its client and would be happy to provide any information in response to
specific client queries. Neither Ghalla Bhansali nor any of its affiliates, group companies,
directors, employees, agents or representatives shall be liable for any damages whether direct,
indirect, special or consequential including lost revenue or lost profits that may arise from or
in connection with the use of the information. Past performance is not necessarily a guide to
future performance. The disclosures of interest statements incorporated in this document are
provided solely to enhance the transparency and should not be treated as endorsement of the
views expressed in the report. Ghalla Bhansali Stock Brokers Pvt. Limited generally prohibits
its analysts, persons reporting to analysts and their family members from maintaining a
financial interest in the securities or derivatives of any companies that the analysts cover. The
analyst for this report certifies that all of the views expressed in this report accurately reflect
his or her personal views about the subject company or companies and its or their securities,
and no part of his or her compensation was, is or will be, directly or indirectly related to
specific recommendations or views expressed in this report.

Information Source:
Investopedia, Businessline, Livemint, NSE, Yahoo

Volatility Index

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Volatility Index

Uploaded by

Copyright:

Available Formats

Gold VOLATILITY INDEX

Uses of Volatility Index

Indian stocks volatility index shows election fears

You might also like