Volatility index flashes fear

Experts advise against bottom-fishing as gauge moves up 16.7% to 28.7

India VIX, a measure of investor perception about the risk of sharp swings, based on options prices, soared to a 15-month high on Tuesday.

Turmoil in global markets and less than expected economic growth data roiled Indian equities. India VIX moved up 16.7 per cent to 28.7, after testing the 30-level.

Only last week, it had jumped 64 per cent, highest ever rise for the period that data is available. Experts reckon that having broken past the 23-level in a little more than a year, the gauge is likely to remain elevated this month. The gauge, however, is still a long way off from the historical peak of 85.13 it had hit on November 17, 2008, in the aftermath of the collapse of Lehman Brothers.

“Foreign institutional investors (FIIs) have been buying out-of-money put options in a big way. They have also been buying index futures. This should have been a bullish trend but these investors have also been selling heavily in the cash market. This shows a negative selling bias among overseas investors,” said Siddarth Bhamre, head of derivatives at Angel Broking.

FIIs pulled out Rs 16,700 crore ($2.5 billion) from Indian equities in August, sending the BSE Sensex down 6.5 per cent, the most since November 2011. Foreign investors are most influential on Dalal Street and their trading activity has a huge bearing on the market. The selling in August was largely due to fear of a China-led global slowing, said analysts.

On Tuesday, benchmark indices shed a little over two per cent, amid weak global cues, to end near their one-year low on the back of weak numbers for general and and factory growth. The country's gross domestic product grew seven per cent for the quarter ended June from a year earlier. The figure is lower than the 7.5 per cent rise in the preceding quarter but higher than the 6.7 per cent in the same quarter a year before.

“The implied volatility for at-the-money put options for the Nifty as of Tuesday was 32 and for at-the-money call options at 26, indicating investors are ready to pay a higher premium for buying put options because they expect a downside in the market,” said Jitendra Panda, managing director, Peerless Securities.

Experts believe this is a sell-on-rise market and investors should be cautious. “Support levels are constantly under threat; we have already broken past two support levels of 8,000 and 7,800 for the Nifty. So, I would not advise investors to do any bottom fishing in this market. Rather than buy at support levels, we are suggesting that investors sell on resistances,” said Bhamre.

According to Sahaj Agrawal, associate vice-president at Kotak Securities, more correction can be expected if the Nifty goes below 7,670.