10 things to know about

India Vix Futures

Traders are often looking for new strategies

to trade a major event, say a budget or
credit policy or even important results like
Infosys. Normally a trader would have
bought, what an option trader calls a Long
Straddle strategy. In entering this strategy,
he would buy a long call and a long put
option of the same strike price and same
expiry.

In order to earn profits from such a strategy,

markets need to move sharply in either
direction such that profit from one direction
would be more than the loss from the other
one. However, the strong following of such a
strategy leaves very little on the table (if at
all) as prices of both the call and put option
rise before the event as they all fear the
extreme.

Volatility is known as a measure of change.

A higher value of volatility indicates that
prices can change at a faster pace (either
going up or down) as compared to the
immediate past.

Before you start trading the India Vix

futures contract, here are 10 points to
consider
1. Globally known as a 'fear index', Vix is
actually one of the best contrarian
indicators in the world. Chicago Board
Options Exchange (CBOE) which owns the
Vix trademark say that since volatility (high)
often signifies financial turmoil, Vix is often
referred to as the investor fear gauge. The
index is colloquially referred to as the fear
index.

2. In India, value of Vix has been computed

by the NSE since November 2007 based on
the out-of-the-money (OTM) option prices
of the Nifty. It has touched a high of 85.13
and a low of 13.04. As it is mentioned in
percentages, value of Vix can never be
below zero or more than 100.

3. Historical data indicates that India Vix has

a strong negative correlation of negative 0.8
to the Nifty. This means that every time Vix
falls, Nifty rises and every time it rises, it
means that a fall is imminent. India Vix
touched a value of 85 percent, a few days
before Nifty touched a bottom post the
Lehman Crisis.
4. India Vix has a mean of 26.65 and a
median of 23.83, these figures are
important for option writers and traders
since Vix has a tendency to revert to the
mean.
5. The India Vix futures contract will have a
weekly settlement and have three running
contracts along with three spreads between
the contracts (spreads are the difference in
prices between two contracts). One need
not have the vision of a planning
commission or a economist to trade the
contracts. A smaller vision of one week or a
maximum of one month is good enough to
determine the volatility. Shorter term Vix
indices are more responsive to short term
volatility which will be induced due to
corporate earnings, government policy
announcements or RBI's policy changes.
6. Volatility is easier to predict than price.
One will not know the price of Infosys after
it announces its results, but it is easier to
know that volatility will increase immediately
after profit and guidance numbers are
announced by the company's management.
7. Vix futures are also considered to be a
better hedge than a index future.This is
because Vix indices are more volatile and
offered three to four times more returns
than an asset based index. The recent 5.4
per cent drop in the Nifty between January
23rd 2014 and February 13, 2014 resulted in
a 14.8 per cent change in the volatility
index.

8. The high gains are precisely the reason

why speculators are attracted towards it.
NSE however, has kept the lot size for each
contract at around Rs 10 lakh which will
attract a margin of Rs 2 lakh, thus making
the product more expensive for the retail
investor.

9. Currently India Vix is in the lowest

quartile, which partly explains the Nifty
trading within three per cent of its all time
high point.
10. In order to promote the futures contract,
NSE is offering rebate ranging between 10
and 40 per cent in transaction charges,
depending on the overall volume.