In my last article, I showed how we can use VIX to determine short term NIFTY ranges. Then we compared the VIX predicted NIFTY ranges with actual NIFTY values to check the effectiveness of VIX for 7-day period.
In this article, we will extend the analysis to two other short term ranges, e.g. 7 days and 14 days.
I am not going to repeat the mathematical formula and the exact steps of calculation in this article anymore. For that, I suggest you check my previous article here - https://aksmtr.com/articles/7-using-vix-to-determine-short-term-nifty-ranges
Short term duration Vs VIX predictions
Given the VIX measure of any given day, if we were to calculate the 7, 10, 15 and 30 day NIFTY ranges in the future, then we would have expected NIFTY to remain within that range for 67% of the times. While that expectation is met for 7 and 10 day short ranges, for longer ranges NIFTY does not stay within that range.
|7-day||71.18 %||67%||Within VIX limit|
|10-day||66.9%||67%||Within VIX limit|
Year-wise conformity to VIX ranges
Now, let's find out how is NIFTY honoring the VIX based ranges over the years. As you can see from the results, 2021 was the best year for NIFTY. For the 2 different time periods analyzed, NIFTY was within the statistical ranges for the most of the periods.
2020 and 2022 (this year) are the worst
Ideally, by the definition of volatility index, we can conclude that the probability of NIFTY to remaining within the VIX limit should be around 67% (1st standard deviation). However, as we see above, in 2022 actual (real) volatility of NIFTY was more than the volatility measured by VIX.
Moreover, note that the above calculations are based on closing price. Incidences of breaches will be more frequent if we consider intraday highs and lows.
Looking at the rare view mirror, it seems to me that 2021 was really a great time for volatility based option traders.