Presentations in Mumbai and Kolkata to Discuss CBOE VIX Index and India VIX – By Matt Moran

Presentations on topics such as (a) the relationships among price movements of stock indexes, the CBOE Volatility Index® (VIX®), and the India VIX Index, and (b) new studies on fund use of options and volatility-based strategies, will be delivered by me to continuing-education meetings of the Indian Association of Investment Professionals (IAIP) in the cities of –

Below are some of the topics I plan to cover in the presentations in India.

VOLATILITY INDEXES SKYROCKETED IN AUGUST

Investors often examine volatility indexes to gauge changes in investor sentiment. In the past two months several worldwide volatility indexes have been in the spotlight as they rose to their highest levels in months or years. In August, for example, the popular CBOE Volatility Index® (VIX®) reached a high of 53.29, and the high for the India VIX Index was 35.57.

VIX candlesick-2015-08 India VIX candlestick-2015-08
The India VIX Index is one of several volatility indexes worldwide that has been legally licensed to use the methodology that is used for the CBOE Volatility Index (VIX). The website for the India VIX notes that —

“India VIX is a volatility index based on the NIFTY Index Option prices. From the best bid-ask prices of NIFTY Options contracts, a volatility figure (%) is calculated which indicates the expected market volatility over the next 30 calendar days. India VIX uses the computation methodology of CBOE, with suitable amendments to adapt to the NIFTY options order book using cubic splines, etc.”

IMPLIED VOLATILITY DROPPED IN EARLY SEPTEMBER

A September 9 story on Bloomberg news by Santanu Chakraborty noted that

“Indian option costs fell for a third day, reflecting reduced demand for protection against equity-market swings, as the CNX Nifty index extended its rebound from the lowest level in more than a year. The India VIX index, the benchmark gauge of equity-option prices, dropped 1.1 percent to 24.3 at the close in Mumbai. The 50-stock Nifty index rallied 1.7 percent to 7,818.60, rising for a second day after closing near a 14-month low on Monday. The price of the Nifty 7,500 put, the contract with the highest open interest, slumped 26 percent. Implied volatility dropped as optimism that China will be able to stabilize its financial markets boosted risk appetite around the world. …”

NEGATIVE CORRELATION FOR VOLATILITY INDEXES

A key reason that many investors are intrigued by volatility indexes is the fact that volatility indexes often have had negative correlations with stock indexes and other indexes. Note in the table below, for example, that the S&P 500 Index weekly returns had negative correlations versus the VIX Index, the S&P 500 VIX Futures Index, and the India VIX Index.

Correlation table India VIX
VOLATILITY INDEXES CAN EXPLODE TO THE UPSIDE

The table below shows all the weeks since 2007 in which the S&P 500 Index rose or fell by more than 5.5%. Note that in all the eleven weeks that the S&P 500 fell by more than 5.5% —

(a) The S&P GSCI Index also fell in each of the 11 weeks – this fact could have made diversification more challenging;
(b) The new CBOE S&P 500 5% Put Protection Index (PPUT) usually also fell, but it did not fall as much as the S&P 500 Index because it held protective put positions;
(c) Both the VIX Index and the S&P 500 VIX Short-Term Futures Index had big gains all 11 weeks. The all-time biggest percentage rise for the VIX Index in one calendar week was the 118.5% gain the week ending August 21, 2014.

Table for India VIX Week
For more information how VIX-related tradable instruments might be used to help diversify a portfolio, please see the 2009 paper by Edward Szado, “VIX Futures and Options: A Case Study of Portfolio Diversification During the 2008 Financial Crisis.”

FUND USE OF OPTIONS AND VOLATILITY-BASED PRODUCTS

In recent years we have received inquiries about fund use of options or volatility-based products; here are some newer resources on this topic —

CONCLUSION

I am looking forward to the events with the presentations in India this week.

For more information on the topics covered above, please visit www.cboe.com/volatility and www.cboe.com/funds.

Investors who wish to hear expert discussions of options and volatility could register for an upcoming CBOE Risk Management Conference (RMC) —

4th Annual RMC Europe: Monday – Wednesday, September 28-30, 2015 at the InterContinental Hotel, Geneva      www.cboermcEurope.com
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1st Annual RMC Asia: Monday – Tuesday, November 30-December 1, 2015, at the JW Marriott Hotel, Hong Kong     www.cboermcAsia.com
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32nd Annual RMC US: Monday – Wednesday, February 29 through March 2, 2016 at the Hyatt Regency Coconut Point, Florida     www.cboermcUS.com

The posts on this blog are opinions, not advice.
Please read our disclaimer for Indices.

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