Slow start for VIX futures

High costs, lot size said to be impediments

Teething troubles have hit volumes for a new derivative instrument allowing investors to take a call on how wildly the market might swing in the days ahead.

Turnover has been on the lower side despite the index measuring volatility (VIX) more than doubling since the product’s launch. Trading volumes for the National Stock Exchange’s VIX derivative has fallen 55.8 per cent since inception. High costs are said to have taken away almost two-thirds of any gains investors would have made through trades. Contract size and tenure are also dampeners, say experts.

Investors traded contracts worth an average of Rs 258 crore a day in the first week of trading. This has fallen to Rs 114 crore in the latest week of trading, shows exchange data. Turnover had touched a low of Rs 52 crore and shown a rising trend since but will need to more than double to touch its initial highs.

Yogesh Radke, head of quantitative research at Edelweiss Securities, said the weekly rollover costs, tenure of contract and lot size are the principal issues market participants are grappling with.

“The lot size was Rs 10 lakh when the product was launched. This has risen on account of the increase in VIX, which has impacted participation. Also, the weekly expiry has been causing a huge rollover cost, which has run as high as 15-20 per cent per week in the past four expiries. Anyone who had gone long on VIX since its launch would have made 140 per cent returns but would have also paid 113 per cent as long roll costs,” he said.

Jitendra Panda, managing director and chief executive officer of Peerless Securities, also said costs and tenure were affecting participation. “Roll costs are very high and people are hoping for longer duration. Many are yet to fully understand the product. It will pick up as understanding improves,” he said.

The India VIX index rose from 13.95 at the time of its launch to 31.13 currently. It had touched a high of 34.38 on Monday.

VIX had risen sharply ahead of the previous elections as well, up from 36 per cent on April 1, 2009, to 55 per cent in the days before the results, according to a Bank of America Merrill Lynch India equity strategy report authored by research analysts Jyotivardhan Jaipuria and Anand Kumar.

“We would expect VIX to rise as we near May this year, too,” said the report, issued when the VIX futures were launched in February.

An NSE spokesperson said they were confident the product would do better in the coming days. “Volumes have been picking up in recent weeks. There is reasonable open interest and we are confident of a pick-up in volumes in days ahead,” said the person.

A lower ticket size might help attract more volumes to the product, said Radke.

“A reduced lot size would help increase the liquidity but post the election, the index is expected to settle down...Increasing the tenure of contracts would be difficult, as the value of one-month futures will be deriving its value from the Nifty Index Option of the second month and third month. Currently the Nifty Index Options have liquidity limited to the first and second month,” he said.