India VIX or the Volatility Index that gauges investor sentiment and fear in the market shot above the psychologically important point of 17 on Tuesday, May 07. In fact, India VIX has surged over 70% from its low of 10, which it touched on April 23. What’s driving this uplove? This time, the volatility gauge is spiking ahead of the general elections and investor concerns about the final result.
“The rise aligns with historical trends, as the VIX typically climbs before major events like general elections,” said Santosh Meena, Head of Research at Swastika Investmart. The historical data shows that the index has seen a jump of 150% during 2019 and over 200% in 2014. “Based on this historical context, a further increase in the VIX is likely, with a potential move towards 25 before the election results,” he said.
“While a lot can be explained in terms of historical trends, the approach of record peaks, upcoming election results, and even the liquidity impact on lot size reduction in Nifty, the recent swings are difficult to fully attribute. Perhaps the right way to approach this is to acknowledge that while VIX and Nifty are positively correlated, more so in a large time frame, the strength of the correlation is low, especially in the short term,” said Anand James, Chief Market Strategist at Geojit Financial Services.
Technical factors at play
Two key factors are driving the VIX’s rise. First, portfolio investors are buying protective put options to hedge their holdings. Second, traders are speculating on significant price movements post-election by purchasing both calls and put options, said Meena.
The mean of straddles during the time period of Feb to Apr 2024 is 198 with a standard deviation of 23, while the straddle on Tuesday, 23rd April, when VIX fell 20% is 180, suggesting that on a closing basis premiums never went as wild as VIX. “So it was just another Tuesday for option premiums, though the impact would have been a tad higher on an intraday basis. VIX needs to sustain above 16 to elucidate higher fluctuations in option premiums,” said James of Geojit.
Support levels
The market’s behaviour so far resembles the 2019 pre-election period, with a potential correction followed by an upswing on results day. Crucial support levels to watch include 22300, 22000, and 21700 on the Nifty. For an upward trend to be established, a breakout above 22800 is necessary, said Meena.
What is raising eyebrows now is how steep and the extent of the rise and fall is despite the short time frame. Just three weeks back, the VIX had fallen to record lows, after Nifty averted a major fall and bounced off the previous month’s low, calming investors.
