VIX futures to launch: BofA-ML's takeaways

The National Stock Exchange will launch futures contracts on the India VIX index from February 26, after market regulator SEBI approved of the instrument.A VIX is a volatility-based index that moves generally moves in the opposite direction to the benchmark index, Nifty in India’s case.The VIX is based on the index options prices of Nifty and is computed using the best bid and ask quotes of the on-the-money near-month and mid-month Nifty options contracts, which are traded on the F&O segment of the NSE.Here are three key takeaways on the VIX as put together by a report by Bank of America-Merrill Lynch.VIX and Nifty have a negative co-relation: In general, India VIX starts to increase at the time of stress in the markets and falls as investors become calm. It is perceived to be one of the best tools to predict near-term market volatility. The correlation between Nifty and VIX over last five years is negative 0.84, a significantly high number, making it a strong indicator for prediction of stress in markets.Markets rise once VIX peaks: Once the VIX has peaked, markets usually give a positive return over one week and one month. Of the four instances when India VIX has crossed 30 percent mark, Nifty has always given a positive return with average return of 6.5 percent in a month.VIX rises ahead of election result; falls post result announcement: Market is usually jittery prior to the declaration of election results as it is uncertain about the outcome. India VIX had jumped sharply prior to the declaration of results showing the underlying fear of investors on the uncertainty of the results. India VIX increased from 36 percent on April 1, 2009 to 55 percent a few days before results. However, it fell sharply to 43 percent once results were announced. We would expect VIX to rise as we near May this year too.