Volatility Index Derivatives
Futures and options contracts written on a volatility index rather than on a price index, with India VIX (the NSE measure of expected 30-day implied volatility of Nifty 50 options) being the relevant Indian benchmark, though NSE's India VIX futures contract was discontinued after limited market interest.
Volatility as an asset class became a major topic in financial markets following the success of VIX futures and options launched by CBOE in the United States from 2004 onwards. The VIX — the CBOE Volatility Index — measures the 30-day expected volatility of the S&P 500 implied by the prices of near-term S&P 500 options. Because volatility tends to spike sharply during market crises (the VIX rose above 80 during the 2008 financial crisis and above 80 again briefly in March 2020), a long VIX futures position provides portfolio insurance that activates most powerfully precisely when equity portfolios suffer the greatest losses.
NSE introduced India VIX in March 2008, calculated using the methodology of CBOE's VIX adapted for Nifty 50 options. India VIX measures the market's expectation of Nifty 50 volatility over the next 30 calendar days, derived from the bid-ask midpoints of out-of-the-money Nifty options across a range of strikes. The index is published in real time during trading hours and has become a widely followed sentiment indicator — rising India VIX readings indicate increasing fear or uncertainty in the market, while low and declining VIX readings indicate complacency.
NSE launched India VIX futures in February 2014, allowing market participants to trade directly on expected volatility. The contracts were cash-settled using India VIX as the final settlement price. However, the India VIX futures market failed to develop meaningful liquidity. Participation remained thin, bid-ask spreads were wide, and the contract was difficult to hedge because replicating the India VIX calculation requires a portfolio of Nifty options across many strikes — a complex and transaction-cost-intensive operation even for sophisticated dealers.
NSE eventually discontinued India VIX futures trading, citing insufficient liquidity. This outcome contrasted sharply with the CBOE's VIX derivatives, which became among the most actively traded derivatives globally. The difference reflects several factors: a larger and more sophisticated institutional investor base in the US, more established volatility trading desks at US banks, and the greater familiarity of US participants with volatility as a distinct risk factor to be actively managed.
India VIX itself remains a useful analytical tool even without a liquid derivatives market. Traders monitor its level and trend when assessing option pricing, directional risk, and event risk around major catalysts such as RBI policy meetings, budget announcements, and election results. The relationship between India VIX and Nifty returns has been extensively studied, confirming the well-known negative correlation between equity prices and volatility measures observed globally.