India’s volatility index, VIX, which gauges investors’ risk perception about sharp swings in the market based on options prices, has risen quite a bit in the past two weeks. This trend is in line with the rise of volatility indices worldwide.
India VIX rose from 19.23 on April 21 to 23.69 on May 5. The rise is even more significant on a month-on-month basis with the index going up from 17.20 on April 6, 2010 to 23.69 on May 5, 2010. That’s a rise of nearly 38%. Still, India VIX is a long way off from its peak of 85.13 it had touched in November 2008, in the aftermath of the global financial crisis that caused equity markets around the world to free fall.
The India VIX seems to be mirroring global volatility trends. For instance, the Chicago Board Option Exchange’s CBOE Volatility Index, based on S&P 500 Options prices, has risen from 18.7 on 21 April to 24.15 on May 5. That’s a gain of about 29.14%. The Dow Jones Industrial Average dipped 2.31% during this period. According to Bloomberg data, the 10-day volatility for the Dow was at 20.58 compared with 13.05 for the last 30 days. This indicates that volatility over the last 10 days has risen.
Of late, Indian equity markets has become increasingly vulnerable to negative newsflow from the Eurozone area. “Investors are panicking because of the fears that Greece and other European countries may not be able to solve their debt crisis,” said Girish Patil, manager-derivatives, Antique Stockbroking. “So, there is a huge demand for put options from foreign institutional investors and domestic mutual funds. This is like buying an insurance against possible meltdown in equity.”
According to Siddarth Bhamre, head of equity derivatives at Angel Broking, FIIs have options strike prices of 4700, 4800, 4900 adding open interest. “This means they expect the market to be volatile and see some correction in the near future. Implied volatility (VIX) is a function of premium. The premium goes up as volatility increases and vice versa,” he said.
In this scenario of rising VIX, Bhamre advises clients to use short strangle in Nifty. “If the market comes to 5000-odd levels then you sell 4,900 put and 5,100 call. This way you get a premium of Rs 170-180 and you are safe till 4,720 on the lower side and 5,280 on the higher side.”...
India VIX has been trading at around 17-18 in April 2010, its lowest levels since the index started in April 2008. Experts feel that the VIX will not fall below its current levels of about 23.
“Whether it will rise is a matter of debate. But it will certainly not fall below these levels,” said Patil of Antique Stockbroking, adding that the Eurozone debt crisis is a significant negative that will loom over the market for some more time.
However, the market could get some respite if the dollar appreciates against the yuan as it will make US goods and services cheaper and more competitive internationally, said Patil....
Source: http://www.financialexpress.com/news/volatility-index-mirror-global-trends-surges-38/616080/2
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