India VIX soars as market drops sharply

Implied volatility soared as traders flocked to options ahead of the Budget to hedge their positions in the cash market

The VIX index, a risk indicator, shot up nearly 10 per cent today, the most this year, following an unexpected sharp fall in the market on concerns that the US central bank would curb its bond-buying programme. Implied volatility (IV) soared as traders flocked towards options ahead of the Union budget to hedge their positions in the cash market.

National Stock Exchange’s (NSE) India VIX index rose 8.6 per cent to 16.94, the highest since November 19, 2012. The CNX Nifty closed at 5,852.25, down 90.80 points, or 1.5 per cent, posting its biggest single-day fall since July 2012.

Typically, ahead of any big event, the VIX index tends to rise, as the market turns more volatile with traders speculating on the outcome of the event. Market players said traders are refraining from taking short positions in the futures market and, instead, are shorting through the options market.

This time, too, the Street is divided on the outcome of the budget and whether the finance minister will meet market expectations.

“Today’s was a sharp fall, which resulted in the increase of implied volatility. Ahead of the budget, we expect more volatility to creep in as there is a huge tug-of-war between the bulls and bears over the market direction,” said Yogesh Radke, head (quantitative research), Edelweiss Financial Services.

“Even if there was negativity getting built up due to macro concerns, such a sharp fall was not expected. Foreign investors, too, are turning cautious. They are buying in the cash market and hedging by going short in the derivatives market,” said Siddharth Bhamre, head of derivatives at Angel Broking.

 

According to derivative analysts, given the stiff resistance the market is facing, a pre-budget rally is unlikely.

Radke said, “We expect resistance to Nifty at 6,000. FIIs have pumped in more than $7 billion since last month. There are some expectations getting built up from the budget. Any disappointment can take the market down sharply.”

Added Bhamre, “5,800 is a strong support for the market. If we go below this level, then forget about a pre-budget rally.” According to Bhamre, the market remains in the buying zone as long as it stays above 5,850.

The VIX index last year had declined more than 50 per cent, as the market rose 26 per cent, the most since 2009. This year, given the volatility in the market, the volatility gauge has risen a little more than 20 per cent.