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 annualised volatility, denoted in percentage e.g. 20%) based on the order book of the underlying index options.

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, a volatility figure (%) is calculated which indicates the expected market volatility over the next 30 calendar days.

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Discovering Market Value

Picking winners out of the ever-expanding list of derivative contracts is not an easy task. However, one can choose the front-runners based on the increasing market-wide position limits (MWPL). Derivatives trading is banned if the open interest crosses 95 per cent of the MWPL.

There is a strong co-relation between the MWPL and the market value. The study shows that higher the MWPL, better the chances of an outperformance or underperformance on the part of the derivative contracts.
A rise in the value of securities, accompanied with high MWPL, indicates the creation of long positions. On the other hand, a decline in value coupled with high MWPL, demonstrates short positions. For example, the NSE banned fresh buying in 13 derivatives contracts till the MWPL falls below 80 per cent. Long positions were created in 12 of the contracts, whereas short positions were seen in Gitanjali Gems. IFCI has been the best performer in the derivatives segment in the last one year.
The open interest data of IFCI shows that its derivatives contract was banned for almost a year as its open interest has consistently been above 95 per cent of the MWPL on the very first day of new contracts series. No wonder, IFCI has surged 10 times in the last one year.

Market Wide Position Limits

At the end of each day the Exchange disseminates the aggregate open interest across all Exchanges in the futures and options on individual scrips along with the market wide position limit for that scrip and tests whether the aggregate open interest for any scrip exceeds 95% of the market wide position limit for that scrip. If yes, the Exchange takes note of open positions of all client/ TMs as at the end of that day in that scrip, and from next day onwards the client/ TMs should trade only to decrease their positions through offsetting positions till the normal trading in the scrip is resumed.

The normal trading in the scrip is resumed only after the aggregate open interest across Exchanges comes down to 80% or below of the market wide position limit.
A facility is available on the trading system to display an alert once the open interest on the NSE in the futures and options contract in a security exceeds 60% of the market wide position limit specified for such security. Such alerts are presently displayed at time intervals of 10 minutes.