Volatility index up over 10% in a day

The India VIX, the country’s stock volatility index, saw a double-digit rise on Tuesday as markets tanked the world over on fresh concerns related to tension between the two Koreas and the euro zone problem spreading to Spain’s banking sector.

According to the National Stock Exchange (NSE), India VIX is based on Nifty (its benchmark index) option prices. The index signifies the amount by which the underlying basic is expected to fluctuate in the near term.

On Monday, the VIX opened the day at 31.30, before rising to the day's high of 35.86. It finally settled at 34.52, a surge of 10.29 per cent over its previous day's close. Meanwhile, the 50-share Nifty lost 2.78 per cent, or 137.20 points, to close at 4,806.75.

This is only the eighth occasion in this calendar year that the VIX has surged more than 10 per cent in a day. The largest single-day rise of 2010 was on May 19, when it rose nearly 21 per cent.

Market experts feel India's VIX is still some distance away from “concerning levels” and that traders will be worried only if it goes beyond 50.

“Though the VIX jumped 10 per cent on Tuesday, I do not think there is a cause for concern yet,” says T S Harihar, head of derivatives, ICICI Securities. “That is because India VIX typically trades at low levels and the average has been around 28.So, we are only a little higher than the average. But, I would be concerned if it crosses 50 because the rise between 50 and 75 coincides with a sharp fall in the market.”

On a different note, a rise in volatility assumes significance also because it is one of the key elements when it comes to pricing of options, that have been gaining steady popularity among all investor classes. In recent months, total options turnover has been much higher than that of futures. Traders generally prefer options when they expect a sharp movement on either side, as the downside for the buyer in an option contract is limited to the premium.

Globally, the VIX has attracted a lot of attention in the recent past as macro-economic factors played havoc across key markets. The US VIX — volatility of the S&P 500 index options — has more than doubled in the past month. On Monday, the US VIX closed at 38.32, nearly 120 per cent higher than April 26, when it was trading below 18.