Lok Sabha election results: Trends send options market in a tizzy

Contract prices see wild swings as NDA's narrow majority fuels concerns

Bear attack made investors poorer by Rs 31 trillion as markets suffered the worst single-day fall in 4 years. Investors had cheered the prospects of another Modi term, but the margin of victory and the prospect of him having to rely on allies spooked the markets

The prices of options contracts went into a tizzy on Tuesday as traders tried to grapple with the unexpected result outcome of the general elections. The prices of several contracts fluctuated by as much as 10x in intraday trade, with the National Democratic Alliance’s (NDA’s) narrow victory margin fuelling concerns over the composition of the new government.

For instance, the National Stock Exchange Nifty’s put options contract with a strike of 21,800 hit a low of Rs 98 and a high of Rs 996 before closing at Rs 515. Likewise, the Nifty call options contract with a 22,500 strike plunged nearly 90 per cent.

The wild swings came as the underlying Nifty 50 plunged nearly 2,000 points, or 9 per cent, compared to the previous day’s close of 23,264. The index hit a low of 21,281 before ending at 21,884.5, down 5.93 per cent.

Options contract prices — which are derived from time value, implied volatility, and expiration time — tend to see sharper swings than the underlying security. Given their volatile nature and low ticker size, the options market has become a big draw for traders and is currently the biggest volume generator.

A day earlier, the Nifty had ended at a record high after exit polls predicted the NDA coalition to win a two-thirds majority.

“The markets had priced in a comfortable victory for the incumbent. The exit polls made traders even more complacent. Even in 2014 and 2019 when the outcome was certain, traders had hedged their portfolios. This time around there was barely any hedging or buying of protection in the run-up to the elections. We haven’t seen anything like this play out in many years. When the markets opened, the verdict was not very clear, as a result, the stock prices went wild. Even now there is a lot of uncertainty about the final outcome. As a result, volatility will remain elevated in the days to come until there is greater visibility,” said Sriram Velayudhan, senior vice-president of IIFL Securities.

The India Vix rose 24 per cent to 25.9 as investors rushed to buy options contracts to hedge their portfolios.

A day earlier, the fear gauge had dropped to 20.9 after the Nifty 50 rose 733 points, or 3.3 per cent, to end the session at an all-time closing high of 23,264.

“The markets and more so the options prices saw wild swings as the election outcome was quite different from what the markets had factored in. Volatility will continue to remain elevated, which is also indicated by the spike in the India Vix. It is difficult to navigate such high volatility. As a result, we are recommending our clients stay away from the options market until stability returns. Since the start of the June series, foreign portfolio investors have held short positions. Some of them got covered on Monday after the exit polls. However, they remain on the short side,” said Ruchit Jain, lead research, 5paisa.

He said investors need to watch the Nifty level of 21,000 and 21,200 on the downside, which is a major support zone. While on the upside, a breach of 22,500 would help improve sentiment.