The Hindu Business Line : NSE volatility index jumps to 67.5 intraday

The recent leg of the correction that has dragged the benchmark indices to new 2008-lows has seen heightened level of trepidation among the investors.

This is reflected in the India VIX (volatility index) spiking above 50, twice in the last three trading sessions.

Though the closing level of the India VIX is well below the peak of 54 points, recorded in January, the index touched its intra-day highs at 57.8 and 67.5 on June 20 and 24 respectively.

The intra-day spike on June 20 can be accounted for by the release of the inflation data that was at a 13-year peak.

But the spike on Tuesday appears mainly due to unwinding pressures, close to the expiry of the June contracts in the derivative segment

Heightened Volatility

This volatility index, recently introduced by the National Stock Exchange, is calculated based on the implied volatility in the put and call options on the Nifty.

In times of heightened volatility, when investors expect the market to make large move lower, the implied volatility expands and so does the VIX.

Conversely, when the markets are sailing higher and investors are complacent, the implied volatility decreases and the volatility index too moves lower.

The India VIX recorded the closing peak at 54.41 on January 28.

Since then, it declined to a low at 23 in May 15. With the return of volatility in the second half of May, this index too has moved higher and is currently hovering in the band between 26 and 32.

The original VIX, that the world watches, is the volatility index based on the S&P 500 index options traded on the Chicago Board of Options Exchange (CBOE).

This index was moving in a very self-content fashion between 10 and 20 between 2003 and mid-2007.

With the eruption of the sub-prime crisis, the index moved beyond the band in August 2007 to record a five-year high at 37.5.

The CBOE VIX is moving in a wide band between 15 and 35 since then, implying that investors’ nerves are far from assuaged. The index is currently hovering around 22.5.

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