The last time VIX closed above the 17-level was on January 30, 2023. VIX, which is based on Nifty options premiums, is a measure of traders’ perception of near-term risks to the market. The index moves up when traders see higher risks in the market, and vice-versa. VIX usually jumps before elections because of the uncertainty of the outcomes. Soon after the election results, the gauge plunges with the uncertainty out of the way.
With forecasts about the performance of the BJP-led NDA, the Dalal Street favourite, fluctuating wildly recently, analysts said the undertone has turned nervous, reflecting in the surge in VIX.
“The rebound in VIX after falling to multi-month lows of about 10, is because participants may be reconsidering their expectations of the number of seats BJP and NDA might win in the elections, along with geo-political and global concerns,” said Chandan Taparia, head of technical and derivatives research at Motilal Oswal Financial Services.
The Sensex and Nifty, which fell about 0.6% on Tuesday, have declined around 2% each in the previous five trading sessions.Taparia said that India’s VIX may also have shot up after the CBOE (Chicago Board Options Exchange) VIX had seen some spike. CBOE VIX moves in line with the stock market’s expectation of volatility based on S&P 500 index options.”The rise in volatility is on expected lines and is indicative of increasing nervousness amidst the ongoing elections and ahead of the election results due in less than a month’s time frame. ,” said Sudeep Shah, head of technical and derivatives research at SBI Securities. “Till VIX holds a 20- day EMA (Exponential Moving Average) of 13-13.50 levels, it could head up to 22-24 levels in the coming few weeks.”The VIX has mostly traded in the band of 11-14 in recent months. In the past five years, the highest level touched was 86 in March 2020 – at the start of the Covid wave.
Shah also said the cost of Nifty put option premiums have risen, pointing to a rise in hedging costs.
“Open interest for Nifty weekly expiry options for 3 weeks combined together is 5-6 times higher than the monthly expiry,” said Dharan Shah, founder of Tradonomy.com, a Mumbai-based investment research advisor. “This leads the VIX to be based on data with lower volumes and lower open interest, and the VIX is unable to provide a fair representation of actual volatility.”
Tradonomy’s Shah said during the last elections, VIX had gone up to 27 levels in May 2019, and up to 31 during the beginning of the Russia-Ukraine war.