Volatility Index Interpretations

The VIX panic recorded at the start of April may only hint at more weakness to come for stocks. Volatility spikes are fairly reliable market timing indicators in small corrective processes, but are unreliable as bottoming signals during periods of greater distress -- and often occur well in advance of the ultimate lows. The volatility index has spiked and closed at a level above 40 for the first time since the 2020 selloff. The market bottomed within eight weeks after an initial VIX close above 40 in four of the seven other instances since 1995; however, the initial VIX jump was followed by more extensive market weakness during the earnings recessions of 2001, 2008 and 2015. Panics in 2001, 2008, 2015 all occurred more than 22 weeks before ultimate market lows, and the average six-month S&P 500 return after the initial spikes was -9.5%. Bloomberg Intelligence

Recently, 𝐍𝐢𝐟𝐭𝐲'𝐬 𝐕𝐨𝐥𝐚𝐭𝐢𝐥𝐢𝐭𝐲 𝐈𝐧𝐝𝐞𝐱 𝐨𝐫 𝐕𝐈𝐗 reached 12.72 indicating some relief among market traders. But what is VIX?   VIX (Volatility Index) is a key market sentiment indicator that measures expected volatility in the Indian stock market in the near term, typically over the next 30 days   Unlike the NIFTY index, which tracks market direction based on stock prices, India VIX focuses solely on volatility. It is calculated using the Black-Scholes model based on NIFTY options prices, considering factors like: - Strike price - Market price of the stock - Time to expiry - Risk-free rate - Volatility   💡𝐅𝐨𝐫𝐦𝐮𝐥𝐚 VIX = 100 * √((Sum[Weighted Implied Volatility Squared])/Total Weight)    - Sum[Weighted Implied Volatility Squared] denotes the sum of the squared implied volatilities (IV) multiplied by the respective weights. Implied volatilities (IV) are usually available on the NSE website -->Market Data-->Derivatives-->Option Chain and their respective weights are the corresponding open interest (OI) values - that tell us how many contracts are currently active for an option strike price - Total Weight denotes the sum of the open interest of all options used in the calculation   💡 𝐇𝐨𝐰 𝐢𝐬 it 𝐮𝐬𝐞𝐝? - 𝐇𝐢𝐠𝐡 𝐕𝐈𝐗 = 𝐇𝐢𝐠𝐡 𝐕𝐨𝐥𝐚𝐭𝐢𝐥𝐢𝐭𝐲: A rising VIX signals increased uncertainty, market swings, or fear (e.g., financial crises) - 𝐋𝐨𝐰 𝐕𝐈𝐗 = 𝐒𝐭𝐚𝐛𝐢𝐥𝐢𝐭𝐲: A declining VIX indicates lower volatility and steady market conditions - Investor Sentiment Gauge: Helps traders assess risk levels before making investment decisions   💡𝐈𝐧𝐝𝐢𝐚 𝐕𝐈𝐗 𝐓𝐫𝐞𝐧𝐝𝐬 - Typically ranges between 15-30 (normal volatility) - Spiked to ~85-90 during the 2008 financial crisis & 2020 pandemic, signalling extreme fear

Why do markets sometimes rise steadily And then suddenly plunge without warning? The answer often lies in one metric: volatility. Take the Indian market today. The Nifty 50 has gained nearly 4% this month. But underneath that calm lies a key signal, India’s Volatility Index (VIX) has dropped from 22 in April to around 12. So, what is VIX? India VIX is the market’s “fear index.” It reflects investor expectations of short-term volatility. A. A low VIX means the market expects fewer surprises B. A high VIX signals uncertainty, risk, and potential sharp movements Historically, when India VIX remains below 15 for a sustained period, it has often preceded new market highs. Why is this important now? Because the calm may not last. There are several potential disruptors ahead: 1. The US is expected to decide on tariff extensions soon 2. Corporate earnings season begins 3. Global macro and geopolitical tensions continue to simmer Even though equity indices are stable today, volatility tends to return when events challenge market assumptions. As investors, it’s not enough to track just returns. Monitoring volatility can give an early read on market sentiment shifts.

 𝗧𝗵𝗲 𝗠𝗮𝗿𝗸𝗲𝘁’𝘀 𝗦𝗶𝗹𝗲𝗻𝘁 𝗧𝗿𝗮𝗽: 𝗖𝗼𝗺𝗽𝗹𝗮𝗰𝗲𝗻𝗰𝘆 𝗕𝗲𝗳𝗼𝗿𝗲 𝗖𝗵𝗮𝗼𝘀 Most traders assume that when VIX (Volatility Index) is low, the market is stable. But history tells us otherwise—some of the biggest market drops came when VIX was low just before an explosive move. When 𝗩𝗜𝗫 𝗶𝘀 𝗳𝗮𝗹𝗹𝗶𝗻𝗴 𝘄𝗵𝗶𝗹𝗲 𝗡𝗶𝗳𝘁𝘆 𝟱𝟬 𝗶𝘀 𝗶𝗻 𝗮 𝗱𝗼𝘄𝗻𝘁𝗿𝗲𝗻𝗱, it often signals complacency in the market—traders might be underestimating potential risks. • 𝗜𝗻 𝗠𝗮𝗿𝗰𝗵 𝟮𝟬𝟮𝟬, 𝗩𝗜𝗫 𝘄𝗮𝘀 𝗮𝘁 𝗹𝗼𝘄 𝗹𝗲𝘃𝗲𝗹𝘀 𝗷𝘂𝘀𝘁 𝗯𝗲𝗳𝗼𝗿𝗲 𝘁𝗵𝗲 𝗰𝗿𝗮𝘀𝗵, 𝘁𝗵𝗲𝗻 𝘀𝘂𝗿𝗴𝗲𝗱 𝗳𝗿𝗼𝗺 𝟭𝟱 𝘁𝗼 𝟴𝟬+ 𝗶𝗻 𝘄𝗲𝗲𝗸𝘀. • 𝗕𝗲𝗳𝗼𝗿𝗲 𝘁𝗵𝗲 𝟮𝟬𝟬𝟴 𝗰𝗿𝗶𝘀𝗶𝘀, 𝗩𝗜𝗫 𝗿𝗲𝗺𝗮𝗶𝗻𝗲𝗱 𝘀𝘂𝗯𝗱𝘂𝗲𝗱 𝘂𝗻𝘁𝗶𝗹 𝘁𝗵𝗲 𝗿𝗲𝗮𝗹 𝗽𝗮𝗻𝗶𝗰 𝘀𝗲𝗹𝗹𝗶𝗻𝗴 𝗯𝗲𝗴𝗮𝗻. Why This Happens? • 𝗟𝗼𝘄 𝗛𝗲𝗱𝗴𝗶𝗻𝗴 𝗔𝗰𝘁𝗶𝘃𝗶𝘁𝘆 – If market participants believe the decline is temporary, they might avoid buying put options, keeping VIX low. • 𝗔𝗯𝘀𝗲𝗻𝗰𝗲 𝗼𝗳 𝗣𝗮𝗻𝗶𝗰 𝗦𝗲𝗹𝗹𝗶𝗻𝗴 – A falling VIX suggests that selling is not aggressive, but this can change quickly if a key support level breaks. • 𝗗𝗲𝗹𝗮𝘆𝗲𝗱 𝗥𝗲𝗮𝗰𝘁𝗶𝗼𝗻 – Sometimes, volatility lags behind price movement. When traders finally realise the risk, VIX can spike suddenly. How to Trade This?  • 𝗠𝗼𝗻𝗶𝘁𝗼𝗿 𝗩𝗜𝗫 𝗦𝗽𝗶𝗸𝗲𝘀 – A sudden intraday rise in VIX could signal the start of panic selling. • 𝗣𝗿𝗲𝗽𝗮𝗿𝗲 𝗳𝗼𝗿 𝗧𝗿𝗲𝗻𝗱 𝗖𝗼𝗻𝘁𝗶𝗻𝘂𝗮𝘁𝗶𝗼𝗻 𝗼𝗿 𝗥𝗲𝘃𝗲𝗿𝘀𝗮𝗹 – If Nifty stays weak despite low VIX, a breakdown may come soon. • 𝗖𝗼𝗻𝘀𝗶𝗱𝗲𝗿 𝗟𝗼𝗻𝗴 𝗩𝗲𝗴𝗮 𝗦𝘁𝗿𝗮𝘁𝗲𝗴𝗶𝗲𝘀 – If VIX is unusually low, buying long straddles or long puts can benefit from a volatility surge. Complacency kills traders. If VIX is low while markets are weak, stay prepared—not trapped. How do you interpret VIX movements in your trades? Drop your thoughts in the comments! #StockMarket #Trading #VIX #Volatility #RiskManagement #Nifty50 #OptionsTrading #INVESTING #technicalanalysis #markets #money #economy

For two decades, Amy Wu Silverman has tracked fear and greed across Wall Street by keeping a close eye on the twists and turns in the Cboe Volatility Index. But last year, she spotted something odd: As stocks plunged in the great inflation crisis, the gauge known as the VIX — which reflects how options traders are betting on swings in the S&P 500 — barely budged. In recent weeks, things have got stranger still. As the Treasury market rout intensified, equities plunged more than they did during the regional bank turmoil in March. Yet the volatility index has still sat below the widely watched level of 20. That’s even as a surprise conflict grips the Middle East and economic worries build on soaring borrowing costs. It’s the first time since 2012 that the Cboe benchmark has stayed this low during stock drawdowns of 5% or more, according to data compiled by eToro and Bloomberg. In searching for reasons, Silverman, who heads up derivatives strategy at RBC Capital Markets, points to the trading frenzy in ultra-short dated options and a marketplace ever more divided between stock winners and losers. But another less noticed but fast-growing force, she says, is the boom in options-selling strategies this year that are sucking in billions of dollars like never before. In previous years, similar trading activity in derivatives-powered investment funds was also blamed for muting the VIX as a signal on economic and market angst. “If you remember 2017, right before we got into Volmageddon in February 2018, the volatility environment smelled similar to right now,” Silverman said. Derivatives specialists at firms including Morgan Stanley and Nomura Securities International have also argued that options-selling funds are acting as a market tranquilizer, day in day out. That’s because whenever the cost of options, or implied volatility in derivatives parlance, creeps up, money managers are ready to jump in and write contracts in order to generate income — all of which essentially serve as indirect wagers on stock calm. In one view, the lack of reaction in the volatility market can be framed as a sign that traders are sanguine about the market outlook, fueled by the projected recovery in corporate earnings and historically favorable equity patterns in the fourth quarter. Yet, the newfound boom in the vol-selling trade has played a key and under-appreciated role, according to a cohort of institutional pros. The VIX peaked at 19.78 as the S&P 500 dropped almost 8% from its July high through last Tuesday. Back in March, when stocks put on a similar retreat, the volatility measure spiked above 26. Underpinning the options-selling strategies is investor desire for steady income that’s only growing at a time when the Fed’s battle against inflation makes both stock and bond returns potentially less reliable. Read more: https://lnkd.in/eQk3Vnd9