Large amount of trading has let the market become volatile, leading to the emergence of volatility instruments in the market to safeguard the risk-averse investors against uncertainties arising out of volatility in asset prices. The basic idea of this paper is to see the effect of VIX, which is a volatility index based on the index option prices; the Index Option (Nifty Option Contracts), whose underlying is an index (Nifty) comprising of many stocks; and the underlying index Nifty, which captures the behavior of the overall equity market. The combined effect of these three indices on open interest, which tells the number of outstanding contracts that exist for a particular stock at the end of the trading day, is studied using Structural Equation Modeling (SEM). The study used NSE data for a period of three years from March 2009 to February 2012. The outcome of the study will aid in understanding the indicators of options market in a better way.

An index of a stock market is the numerical reflection of a collection of stocks and its value changes in relation to the stocks that form part of the index. Indian stock market witnessed derivatives trading only by the middle of 2000 with the introduction of index futures and index options. An index is significant to evaluate the performance of investments in a relevant market. S&P CNX Nifty constitutes 50 stock indices representing 22 sectors of the economy and is used for benchmarking fund portfolio, index funds and index-based derivatives. As on March 30, 2012, 65.57% of the free floating market capitalizations of NSE-listed stocks were embedded in S&P CNX Nifty. Trading on index options was introduced on June 4, 2001 by NSE and these option contracts are European style and cash settled based on S&P CNX Nifty’s popular market index. To avoid big losses, large fund managers hedge their cash position using Nifty options.

Large amount of trading has let the market become volatile. Thereafter, the volatility instruments have emerged in the market to safeguard risk-averse investors against uncertainties arising out of volatility in asset prices. The value of implied volatility of derivative contracts is gauged by volatility instruments which are basically financial instruments. The benchmark of stock market volatility, Indian VIX, was introduced in April 2008 by NSE. The computation of India Volatility Index (India VIX) is from the best bid and ask quotes of “out-of-the-money”, near and mid-month option contracts of Nifty. The perception of investors towards near-term market volatility has been determined by India VIX.

Applied Finance Journal, Corporate Board Structure, Pricing Performance, Initial Public Offerings (IPOs), Maturity of the firm, Offer Value (OV), Investment bank prestige, Debt position, CEO-led IPO firms, Initial Public Offerings.