Today, Dalal Street’s index of near-term volatility, the India VIX, plunged as much as 22% in one of the greatest single-day drops in the history of the stock market, leaving Nifty option traders scratching their heads.
India VIX, which is derived from the best bid and ask prices of near- and mid-month Nifty option contracts that are not in the money, dropped below the 10-point threshold. Nifty increased by up to 0.5% during the day to reach a high of 22,447.
On April 23, the India Vix dropped by 20%.
The VIX, ah! It resembles the stock market’s mood ring. An increase in value is akin to the market expressing, “Hey, we’re feeling a bit uncertain or nervous about what’s coming next.”
You now see why it’s referred to as the “fear index.”
India’s volatility index Vix records its steepest decline in almost five years.
The market volatility indicator known as the India Vix experienced its worst decline in five years on Tuesday, concluding around all-time lows. Markets, according to analysts, might have played a role in the general elections supporting the status quo. The index fell 19.7% to close the session at 10.2, possibly as a result of geopolitical tensions lessening following Israel’s more restrained response to Iran’s drone and missile strikes.
This was the greatest one-day decline for the index since 2008, and the steepest correction since May 23, 2019, the day the results of the 17th Lok Sabha elections were announced. In contrast to today, practically all of the larger decreases have mostly coincided with high Vix levels.
India’s steep declines When the results of the general election were declared, vix were last observed. On the day of the results, it decreased by almost 34% in 2014 and 30% in 2019. The decline that occurred today is the largest after the previous two, according to Apurva Sheth, head of SAMCO Securities’ market perspectives and research.
Once the election results are declared, the India Vix usually declines since there is less uncertainty. But, Sheth added, given the opposition’s lackluster performance, markets might have already priced in a win for the BJP-led NDA this time.
The decrease in lot sizes in options contracts may possibly be the cause of the abrupt decline in the Vix. Due to volatility brought on by worries about geopolitical tensions and the US Federal Reserve’s decision to postpone rate reduction, investors’ attention has turned to earnings this week.
The index, which is calculated by the National Stock Exchange (NSE) to reflect market expectations of volatility and changes in the near future, is often referred to as the “fear gauge.” Option prices are used to calculate the index. An index number that is low suggests that traders are not anticipating extreme fluctuations in the market. Comparably, a higher reading, which is typically observed before to significant occurrences like election results or the Union Budget, denotes market participants’ uncertainty.
The Vix theoretically shows the expected volatility over the next thirty calendar days. Therefore, traders’ confidence in the current upswing increases with a lower Vix,” according to Anand James, chief market strategist at Geojit Financial Services.
A decline in the fear gauge may have resulted from the Nifty option contracts’ lot sizes being reduced from 50 to 25 beginning with the May expiry. This move is expected to improve liquidity and decrease the bid-ask spread of call and put options.
Even as elections were taking place, some market participants noted that Tuesday’s sharp decline was unexpected. They explained that it was because of inaccurate option prices that were displayed on Tuesday for a range of strike prices. In India, Vix is not traded, in contrast to the US. Consequently, the India Vix is only of symbolic importance.
In the United States, trading in the CBOE Volatility Index, which is based on S&P 500 index options, is quite common. This is done through the Chicago Board Options Exchange. Additionally, local exchanges have been pleading with the market watchdog to permit trading on India Vix.
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