Volatility Index
Volatility Index is a measure of market’s expectation of volatility over the near term. Usually, during periods of market volatility, market moves steeply up or down and the volatility index tends to rise. As volatility subsides, volatility index declines. Volatility Index is different from a price index such as NIFTY. The price index is computed using the price movement of the underlying stocks. Volatility Index is computed using the order book of the underlying index options and is denoted as an annualised percentage.

The Chicago Board of Options Exchange (CBOE) was the first to introduce the volatility
index for the US markets in 1993 based on S&P 100 Index option prices. In 2003, the
methodology was revised and the new volatility index was based on S&P 500 Index options.

Since its inception it has become an indicator of how market practitioners think about
volatility. Investors use it to gauge the market volatility and base their investment decisions
accordingly.

India VIX
India VIX is a volatility index computed by NSE based on the order book of NIFTY Options. For this, the best bid-ask quotes of near and next-month NIFTY options contracts which are traded on the F&O segment of NSE are used. India VIX indicates the investor’s perception of the market’s volatility in the near term i.e. it depicts the expected market volatility over the next 30 calendar days. Higher the India VIX values, higher the expected volatility and vice versa.

India VIX :: computation methodology
India VIX uses the computation methodology of CBOE, with suitable amendments to adapt to the NIFTY options order book. The formula used in the India VIX calculation is:



* “VIX” is a trademark of Chicago Board Options Exchange, Incorporated (“CBOE”) and Standard & Poor’s has granted a license to NSE, with permission from CBOE, to use such mark in the name of the India VIX and for purposes relating to the India VIX. For more details, checkout "White paper on India VIX"

Above all, is technical definitions which you can find in nseindia.com site. Lets come to the debatable areas of discussion on VIX. Below are my observations,
  • VIX above 60 are dangerous levels. Markets will be highly unpredictable. If Markets are on a high (Nifty P/E above 24), then its advisable to exit the markets completely. Markets may be hot and totally bullish, but will most likely face a darker correction. Its just a question of time.
  • VIX below 20 mostly indicate a more stable markets, purely because the volatility is less. It does not mean that markets wont fall. It just means that markets will follow predictable fundamental supports and resistances.

Both the above observations are another perspective to an old saying "Be fearful when everyone's greedy and be greedy when everyone's fearful". Exit when volatility (VIX) is dangerously high.

Checkout "VIX Chart" for more analysis on how to predict long term market trends.