What is India VIX and How to use it's historical data to our advantage

If you have been trading for a while, you must have come across a term called India VIX. the VIX stands for the volatility index.

As volatility plays a huge role when it comes to trading options, The VIX helps traders to plan their trades according to the market sentiments.

Well, today we will find out what is India VIX, How to use it, and Like always, In the last section of this blog, We have done some backtesting and have got really interesting data to show to you all!

But before coming to that, Let’s try to understand what does the VIX mean?

Explanation of the India VIX #

Firstly, a very common thing I would like to address here is, that many traders think that the VIX tells them the direction of the market. This is simply a myth. The India VIX does not tell directions, it shows us the market sentiments.

The range of the VIX is always 0 to 100 because it is calculated on a % basis.

The VIX is also called the fear index. A high VIX shows uncertainty in the market and a low VIX indicates a dull market.

Now that you have got an idea of the India VIX, let’s see how it is used.

Trading options using the VIX #

The VIX is mostly used by the traders who trade Options

Traders gauge the market sentiments by looking at the VIX. A high VIX favors the option sellers Because whenever the VIX is high, option premiums are high or inflated, and a low VIX favors the options buyers because the premiums are cheap.

Back-testing data in seconds with Quantplay #

The VIX reading changes daily and we have used this to come up with a very interesting observation!

We have back-tested the daily % change in the India VIX over the last 3 years. The reason behind this was to find out days on which the India VIX is generally higher.

Now let’s see how to do it!

from quantplay.service import market
import pandas as pd

india_vix = market.data(interval="day",
                   symbols_by_security_type={
                       "EQ" : ["INDIA VIX"]
                   })
india_vix.loc[:, "day_of_week"] = india_vix.date.dt.day_name()

india_vix.loc[:, "intraday_return"] = india_vix.close/india_vix.open - 1
india_vix.groupby(['day_of_week']).intraday_return.describe()

The results of this can be seen below – #

	           count      mean	   std	     min	       25%	       50%	      75%	     max
day_of_week
Friday	      651.0	  0.000725	0.055590	-0.339407	  -0.029350	  -0.005223	  0.025468	0.307822
Monday	      663.0	  0.028579	0.062637	-0.216176	  -0.003956	  0.023389	  0.056524	0.643107
Thursday      666.0	  -0.003574	0.055672	-0.297503	  -0.031990	  -0.009376	  0.017963	0.333092
Tuesday	      666.0	  0.000095	0.053970	-0.136621	  -0.032433	  -0.005898	  0.021605	0.266904
Wednesday     670.0	  0.001117	0.043146	-0.170011	  -0.024902	  -0.001370	  0.023206	0.205386

According to this, the India VIX is generally high on Mondays with a rise of 2.8% and usually the lowest on Thursdays.

Now, there can be many reasons behind the VIX being high on Monday. Some of them are as follows –

1. On Monday, the market opens after a 2-day gap, the market has to respond to all of the news coming in on the weekends which creates uncertainty at the start of Monday. This results in high volatility.

2. Options have to factor in the weekend decay in their premiums. This too increases the volatility.

You can use information like this to your advantage. For example, knowing that the volatility will be higher on Mondays, you can prefer option buying rather than option selling on days like these.

Conclusion – #

Remember the India VIX doesn’t tell you the direction, it only tells the sentiment. The VIX helps us to gauge the most important thing in the market, Which is fear.

And the best part of all of this is that You can now use and back-test various strategies and years of data in just a matter of few seconds using Quantplay.

I hope you enjoyed reading this blog!